One of the most talked about methods of determining property damage is the Diminution in Value Appraisal (DIV). Perhaps this Appraisal is also the most misunderstood as well. We find this to especially be the case, with inexperienced people. While DIV Appraisals apply to both personal and real property, this article will focus on that of real estate.
Occasionally I am asked, what exactly is a DIV Appraisal? Why would a simple appraisal of the lost rights to property not be sufficient, as opposed to the more complex DIV? How does one convey to the appraiser the information needed for a given circumstance?
The theory behind the DIV Appraisal, as opposed to the typical Market Value Appraisal, focuses not on the overall value of the property, but that of lost value, due to an event or circumstance.
Black's Law Dictionary defines Diminution in Value as:
Rule of damages which provides the difference between “before” and “after” values of property, which has been damaged or taken.
In short the DIV Appraisal is a complex appraisal used to determine damages to a property, resulting from a loss in a portion of the bundle of rights, possessed by the property. The purpose of the DIV Appraisal, generally is to determine damages either from title defects or from a loss of a portion of the physical property. In today's world that usually is a result of one of the following:
- A title insurance policy claim brought on by a policyholder, due to a defect in title.
- An eminent domain taking of a portion of a property, usually by a branch of the government and deemed to be in the public interest.
Technically the DIV is determined from the combination of different values. They are as follows:
- The Unimpaired Market Value of a property, assuming free of defects.
- The Impaired Market Value, considering defects experienced by a property.
- The Damage Value of a property, representing the difference between the Unimpaired Value and the Impaired Value.
In the case of the Unimpaired Value, the appraiser assumes that the property is free of any lost rights.
In the case of the Impaired Value, the appraiser considers the economic effect of any lost rights experienced by the property, such as lost area, easements, encroachments, access, etc.
What is the difference between simply appraising the lost rights to a property and going through the process of performing a DIV? In some cases there will be none. In others, the difference may be significant. We have all heard the old adage, “the sum of the parts does not always equal the whole”. That very often is the case, where a property owner has lost a portion of the rights to a property. A few examples of often encountered losses are offered.
- Loss of a portion of a residential lot, including that of a garage driveway, denying the property owner vehicular access to the garage. Functional Obsolescence!
- Loss of part of a commercial lot, including all of the property’s road frontage, denying the property owner highway access to the property. Landlocked!
- Residence loses front yard and is left five feet from thoroughfare, suffering from traffic noise and safety issues. Proximity Damage!
- Loss of a portion of a vacant commercial lot requiring a well and septic system, rendering the property too small for both a well and septic drainfield. Unbuildable!
It should be noted that in all of the above instances, property owners did not only lose land area to their properties, but in all cases they had other damages, which would not have shown up in an appraisal reflecting only the loss of the land area. Therefore the need for the DIV Appraisal.
Yes the land area is lost, however other steps are required to access the entire economic damage incurred. Appraisers typically address these additional losses in a variety of ways. Where possible, a simple cost to cure is computed and added to the reduction in value over and above that of the land area lost. In the case of a land locked property, the price per acre of the remaining property is usually reduced significantly, reflecting what a neighboring property owner would pay for the damaged land, as an assemblage to adjoining property. In cases where the damage is incurable, other measures are used to access damage. A noisy house beside a recently expanded road, which previously rented for $2,000 per month, is now commanding only $1,600. This is a good example of a loss of a 20% in utility.
While the above examples are typical, each case is different. It is therefore up to the appraiser to analyze the loss of utility and convert this loss to that of loss in Market Value for the property as a whole. Choosing a competent appraiser to perform the DIV Appraisal, is a critical to the accurate valuation of the diminution in value of the property.
Is ordering a DIV Appraisal as simple as telling the appraiser to perform one? Probably not, depending upon the complexity of the case. The key to obtaining a credible valuation of a loss in property rights, is communicating the loss in legal as well as appraisal terms to the appraiser. A current survey showing the details of the property before and after the loss, is necessary.
It is critical not only to choose a competent appraiser to perform the DIV Appraisal, but also to develop a technical explanation of the work to be performed. This combination should provide the basis for a credible DIV Appraisal, for use by everyone concerned, in settling a property damage case.
Charlie Elliott, MAI, ASA, SRA, a Certified General Appraiser is the founder of ELLIOTT & Company Appraisers. Elliott & Company is an Appraisal Management Company specializing in complex title claim valuations for the title insurance industry. Mr. Elliott is not an attorney and nothing contained herein should be construed as a legal opinion or legal advice. All statements and opinions contained herein are those developed by Mr. Elliott given his three decades of education, training and experience as a complex property appraiser.