What is the main purpose of the Jurisdictional Exception Rule within USPAP?

Appraisal Standards and Professional Practice

Introduction: Appraisal Standards and Professional Practice

The integrity of real estate appraisal practice is fundamentally underpinned by adherence to established standards and principles of professional conduct. This chapter, entitled "Appraisal Standards and Professional Practice," delves into the critical framework that governs the appraisal profession, ensuring reliability, objectivity, and ethical decision-making in the valuation of real property. The scientific importance of these standards lies in their role in promoting market efficiency and stability. By fostering confidence in appraisal outcomes, they contribute directly to sound investment decisions, accurate financial reporting, and equitable property taxation. The absence of universally accepted and rigorously enforced standards would introduce unacceptable levels of uncertainty and bias into the appraisal process, ultimately undermining the trust placed in valuation estimates.

The primary objective of this chapter is to provide a comprehensive understanding of the regulatory landscape and ethical obligations that define professional appraisal practice. Specific educational goals include: (1) elucidating the historical evolution of appraisal standards, with a particular focus on the pivotal role of the Appraisal Foundation and the Uniform Standards of Professional Appraisal Practice (USPAP); (2) examining the specific requirements for appraiser certification and licensing, emphasizing the role of the Appraiser Qualifications Board (AQB) in establishing competency criteria; (3) providing a detailed overview of the core components of USPAP, including the Ethics Rule, Competency Rule, Scope of Work Rule, and Jurisdictional Exception Rule, and their implications for appraisal methodology; (4) to describe the organizational structure of the various national and state appraisal entities and how they operate and what their role is in the overall appraisal structure; (5) analyzing the critical role of appraisal management companies (AMCs) in ensuring appraiser independence and mitigating conflicts of interest, and (6) exploring the code of ethics and professional practice guidelines promulgated by organizations such as the National Association of Independent Fee Appraisers (NAIFA), emphasizing the importance of maintaining public trust and confidence in the appraisal profession. By the conclusion of this chapter, participants will be equipped with a robust understanding of the theoretical underpinnings and practical applications of appraisal standards, enabling them to conduct ethical, competent, and credible appraisals of unique properties such as co-ops and timeshares.

Appraisal Standards and Professional Practice

Chapter: Appraisal Standards and Professional Practice

This chapter explores the core principles governing appraisal standards and professional practice, emphasizing the scientific underpinnings and practical application of these principles in the context of appraising unique properties like co-ops and timeshares. We will examine the evolution of appraisal standards, the role of organizations like the Appraisal Foundation, and the ethical and competency requirements for appraisers.

I. Foundations of Appraisal Practice

Appraisal is not merely an opinion of value; it is a professional service grounded in economic theory, statistical analysis, and a thorough understanding of real estate markets. The principles of appraisal practice are designed to ensure objectivity, accuracy, and reliability in value estimations.

• Market Efficiency and Information Asymmetry: Appraisal seeks to reduce information asymmetry between buyers and sellers in the real estate market. Efficient Market Hypothesis (EMH) suggests that asset prices fully reflect all available information. However, real estate markets are rarely perfectly efficient. Appraisers play a crucial role in gathering and analyzing information, thereby improving market efficiency and informing decision-making.

• Supply and Demand Equilibrium: Appraisal relies on understanding the forces of supply and demand. The principle of substitution suggests that a rational buyer will pay no more for a property than the cost of acquiring an equally desirable substitute. This principle forms the basis of the sales comparison approach. The equilibrium price (Pe) and quantity (Qe) can be conceptually shown as the intersection of supply (S) and demand (D) curves.

  • Graphical representation: A graph plotting price on the y-axis and quantity on the x-axis, with upward sloping S and downward sloping D curves.
  • Highest and Best Use Analysis: Central to appraisal is determining the most probable use of a property that is legally permissible, physically possible, financially feasible, and maximally productive.
  • Anticipation Principle: Value is based on the present worth of future benefits. This applies especially to income-producing properties, where the present value of expected future income streams determines the property's value.

II. The Appraisal Foundation and USPAP

The Appraisal Foundation plays a central role in promoting professionalism and establishing standards for the appraisal profession. Its primary functions are carried out through its boards.

• Appraisal Standards Board (ASB): The ASB develops, interprets, and amends the Uniform Standards of Professional Appraisal Practice (USPAP). USPAP comprises:

  1. Preamble: Overview of the standards.
  2. Ethics Rule: Emphasizes integrity, objectivity, and ethical conduct.
  3. Competency Rule: Requires appraisers to possess the necessary knowledge and experience.
  4. Scope of Work Rule: Mandates a credible scope of work to produce reliable results.
  5. Jurisdictional Exception Rule: Addresses conflicts between USPAP and local laws.
  6. Definitions: Provides precise meanings of appraisal terms.
  7. Standards: Ten specific standards covering various aspects of appraisal development and reporting (see Figure 14-7 in included PDF).
  • Example: Standard 1 (Real Property Appraisal, Development) requires appraisers to identify the problem, determine the scope of work, collect and analyze data, and develop credible opinions and conclusions.

  • Appraiser Qualifications Board (AQB): The AQB sets minimum education, experience, and examination requirements for appraiser licensing and certification. (See Figures 14-3, 14-4, 14-5 in included PDF for specific requirements).

  • Education Requirements: The AQB establishes specific coursework requirements for different license levels, including basic appraisal principles, procedures, and specialized topics.

  • Experience Requirements: Appraisers must accumulate a certain number of experience hours under the supervision of a certified appraiser. This experience must be documented and verified.
  • Appraisal Practices Board (APB): The APB serves to codify and implement best practices and applications for appraisers.

III. Certification and Licensing: A Scientific Approach

State certification and licensing of appraisers aim to ensure competence and adherence to ethical standards. These processes are rooted in psychometric principles and statistical analysis to objectively assess appraiser knowledge and skills.

1. Education and Coursework: The required coursework is based on a structured curriculum designed to cover fundamental appraisal concepts and methodologies. The number of hours and specific modules vary based on the license level (Trainee, Residential, Certified Residential, Certified General - See Figures 14-3, 14-4, 14-5 in included PDF).
   • Experiment: Analyzing the effectiveness of various educational formats (e.g., online vs. in-person) in conveying appraisal concepts.
2. Supervisory and Trainee Requirements: Trainee appraisers must work under the supervision of a certified appraiser who meets specific criteria.

3. State Examinations: State appraisal examinations are designed using psychometric principles to assess appraiser competency. Statistical analysis is used to ensure the validity and reliability of the exams.

   • Validity: Does the test measure what it is supposed to measure?

   • Reliability: Does the test produce consistent results over time?

   • Example: Statistical techniques such as item response theory (IRT) are used to analyze exam questions and identify those that effectively discriminate between competent and incompetent appraisers.

4. Continuing Education: Appraisers are required to complete continuing education courses to maintain their licenses and stay current with industry standards and best practices.

IV. Ethical Considerations and Professional Conduct

Ethical conduct is paramount in appraisal practice. The Ethics Rule of USPAP outlines specific obligations related to conduct, management, confidentiality, and record-keeping.

1. Objectivity and Independence: Appraisers must maintain objectivity and independence in their work, avoiding conflicts of interest and undue influence.

   • Example: An appraiser should not accept an assignment if they have a personal relationship with the client or a financial interest in the property.

2. Confidentiality: Appraisers must protect the confidentiality of client information, disclosing it only to authorized parties.

3. Record Keeping: Appraisers must maintain accurate and complete work files to support their opinions and conclusions. The record-keeping section sets out the record keeping requirements for all written or oral appraisals, including the types of records that must be kept, and the length of time that the records must be maintained.
4. Avoiding Contingent Fees: Appraisal fees should not be contingent on the value of the property, as this could compromise objectivity.
5. Errors and Omissions Insurance: Appraisers must carry errors and omissions insurance to protect themselves against liability for mistakes or omissions.

V. Appraising Unique Properties: Co-ops and Timeshares

Appraising unique properties like co-ops and timeshares requires a specialized understanding of their legal structures, ownership rights, and market characteristics.

1. Co-ops:

   • Legal Structure: A co-op is a type of housing where residents own shares in a corporation that owns the building. The corporation grants residents a proprietary lease, giving them the right to occupy a specific unit.
   • Valuation Challenges: Valuing co-ops can be challenging due to limited market data and the restrictions imposed by the co-op corporation (e.g., transfer fees, board approval).
   • Scientific Application: Appraisers must carefully analyze comparable sales, considering the specific characteristics of the co-op corporation and the subject unit.

2. Timeshares:

   • Legal Structure: A timeshare is a form of shared ownership where buyers purchase the right to use a property for a specific period of time each year.
   • Valuation Challenges: Valuing timeshares is complicated by the limited resale market, the transient nature of ownership, and the varying quality of timeshare resorts.
   • Scientific Application: Appraisers must analyze sales data from the timeshare resale market, considering factors such as the resort location, the time of year, and the quality of the unit. Statistical analysis can be used to identify trends and patterns in timeshare values.

VI. Professional Appraisal Organizations and Resources

Professional appraisal organizations, such as the American Society of Appraisers (ASA) and the National Association of Independent Fee Appraisers (NAIFA), provide education, certification, and resources for appraisers. (See Figure 14-2 in included PDF for a list of organizations).

• These organizations promote ethical conduct, competence, and adherence to industry standards.
• They also offer continuing education courses and professional development opportunities.

VII. Conclusion

Appraisal is a science-based profession that requires a deep understanding of economic theory, statistical analysis, and real estate markets. Adherence to USPAP and ethical principles is essential for maintaining public trust and ensuring the reliability of value estimations. As the real estate market evolves, appraisers must continue to enhance their knowledge and skills through ongoing education and professional development.

Appraisal Standards and Professional Practice: A Scientific Summary

This chapter focuses on the establishment, maintenance, and enforcement of appraisal standards and ethical conduct within the appraisal profession. It highlights the evolution of the industry from a largely unregulated field to one governed by uniform standards and stringent licensing requirements, primarily driven by the savings and loan crisis of the 1980s and subsequent federal legislation.

Main Scientific Points:

1. Development of Uniform Standards: The chapter outlines the formation of the Appraisal Foundation and its associated boards (Appraisal Standards Board (ASB), Appraisal Qualifications Board (AQB), and Appraisal Practices Board) and the creation of the Uniform Standards of Professional Appraisal Practice (USPAP). The USPAP acts as a centralized and standardized reference that offers the standards for appraisal and reporting.
2. Regulatory Framework: The Financial Institutions Reform, Recovery, and Enforcement Act of 1989 (FIRREA) and its impact on mandating state licensing and certification of appraisers are detailed. This act scientifically changed the standard for appraisers to be more knowledgeable. FIRREA requires that any appraisal that is made in connection with a “federally related transaction” be performed by a state-certified or state- licensed appraiser
3. Licensing and Certification Requirements: The educational, experiential, and examination prerequisites for different levels of appraiser licensure (Trainee, Residential, Certified Residential, and Certified General) are scientifically explained, emphasizing the AQB's role in establishing minimum qualification criteria.
4. USPAP Structure and Content: The chapter breaks down the components of USPAP, including the Preamble, Ethics Rule, Competency Rule, Scope of Work Rule, Jurisdictional Exception Rule, Definitions, Standards Rules, Statements on Appraisal Standards, and Advisory Opinions, demonstrating the depth and breadth of the guidelines governing appraisal practice.
5. Ethical Considerations: The importance of ethical conduct, objectivity, and independence in appraisal practice is stressed, focusing on the Ethics Rule within USPAP, which addresses conduct, management, confidentiality, and record-keeping requirements.
6. Role of Appraisal Management Companies: The chapter explains the function of Appraisal Management Companies (AMCs) in ensuring appraiser independence and unbiased reports in mortgage transactions, highlighting the legally required "firewall" between lenders and appraisers.

Conclusions:

The establishment and enforcement of appraisal standards, particularly through USPAP and the work of the Appraisal Foundation, have significantly improved the reliability and credibility of the appraisal process. Licensing and certification requirements enhance professional competence, while ethical guidelines promote integrity and public trust.

Implications:

• Protection of Public Interest: Adherence to appraisal standards safeguards the interests of consumers, lenders, and other stakeholders by ensuring accurate and unbiased property valuations.
• Risk Mitigation: Standardized appraisal practices minimize the risk of fraudulent or misleading appraisals, which can have significant financial consequences.
• Professional Accountability: Licensing, certification, and disciplinary mechanisms hold appraisers accountable for their actions and promote ethical conduct within the profession.
• Continuous Improvement: The ongoing development and modification of USPAP, along with continuing education requirements, foster continuous improvement in appraisal practices and ensure that appraisers stay abreast of industry changes.
• Economic Stability: Reliable appraisals are critical for informed decision-making in real estate markets, contributing to economic stability and sustainable growth.