Appraisal Standards and Professional Practice

Chapter: Appraisal Standards and Professional Practice

Introduction

This chapter delves into the critical area of appraisal standards and professional practice. Understanding these standards is fundamental for anyone involved in real estate appraisal, ensuring ethical conduct, competence, and reliable valuation. We will explore the historical context leading to the establishment of these standards, the key organizations involved, the specific standards themselves, and the implications for professional practice.

I. Historical Context and the Need for Appraisal Standards

Prior to the late 20th century, the appraisal profession lacked standardized practices and regulatory oversight. This lack of uniformity contributed to inconsistencies and, in some cases, unethical behavior, ultimately impacting the reliability of valuations. The Savings and Loan (S&L) crisis of the 1980s exposed the vulnerabilities of the system and highlighted the necessity for industry-wide standards and regulations.

• The S&L Crisis: Questionable appraisal practices were identified as a contributing factor to the widespread failures of S&L institutions. Inflated property values and a lack of independent valuations led to risky lending practices and significant financial losses.

• The Response: In response to this crisis, a collective effort was initiated by the appraisal industry and the federal government to establish and enforce uniform standards of professional appraisal practice.

II. The Appraisal Foundation and its Role

The Appraisal Foundation (TAF) is a non-profit organization established in 1987. Its primary purpose is to promote professionalism in the appraisal industry by ensuring appraiser qualifications and upholding the Uniform Standards of Professional Appraisal Practice (USPAP). TAF does not regulate appraisers directly, but rather sets standards for others to follow.

• Formation: Nine professional appraisal associations (listed in the original document) joined forces to create the foundation.

• Mission: To foster public trust by establishing and promoting valuation standards and appraiser qualifications.

• Key Components: The Appraisal Foundation operates through several key boards and committees:

  • A. Appraisal Standards Board (ASB): The ASB is responsible for developing, interpreting, and revising USPAP. They continuously update the standards to reflect evolving appraisal practices and address emerging issues.

  • B. Appraiser Qualifications Board (AQB): The AQB establishes minimum education, experience, and examination requirements for appraiser licensing and certification. They work to ensure that appraisers possess the necessary skills and knowledge to perform competent valuations.

  • C. Appraisal Practices Board (APB): This relatively new board serves to codify and implement the best practices and applications for appraisers.

III. The Uniform Standards of Professional Appraisal Practice (USPAP)

USPAP is the cornerstone of appraisal standards in the United States. It provides a framework for ethical and competent appraisal practice, encompassing all aspects of the valuation process. USPAP is not a law itself, but it has been incorporated into law via FIRREA, therefore making it legally binding.

• A. Structure of USPAP: USPAP consists of several key components:

  1. Preamble: An introduction providing the rationale and organizational structure of USPAP.

  2. Ethics Rule: Establishes ethical obligations for appraisers, including integrity, objectivity, independence, and confidentiality.

  3. Competency Rule: Requires appraisers to possess the necessary knowledge and experience to perform an appraisal assignment competently, or to take steps to achieve competency.

  4. Scope of Work Rule: Defines the extent of research and analysis required for a credible appraisal assignment. The scope of work must be sufficient to produce credible assignment results.

  5. Jurisdictional Exception Rule: Allows for modifications to USPAP when local laws or regulations conflict with its requirements.

  6. Definitions: Provides precise definitions of key terms used throughout USPAP.

  7. Standards 1-10: Specific guidelines for various appraisal activities (see figure 14-7 in the original document):

     • Standard 1: Real Property Appraisal, Development
     • Standard 2: Real Property Appraisal, Reporting
     • Standard 3: Appraisal Review, Development, and Reporting
     • Standard 6: Mass Appraisal, Development, and Reporting
     • Standards 7 & 8: Personal Property Appraisal, Development & Reporting
     • Standards 9 & 10: Business Appraisal, Development & Reporting

  8. Statements on Appraisal Standards (SAS): Clarify, interpret, explain, or elaborate on existing Standards Rules.

  9. Advisory Opinions (AO): Offer guidance on applying USPAP in specific appraisal scenarios, but are not binding.

• B. Key Concepts Within USPAP:

  1. Ethics Rule: The Ethics Rule mandates ethical conduct in all aspects of appraisal practice, including:

     • Conduct: Avoiding misleading or fraudulent behavior.
     • Management: Maintaining ethical business practices, including transparent compensation arrangements and honest advertising.
     • Confidentiality: Protecting client information and appraisal results, with limited exceptions.
     • Record Keeping: Maintaining thorough and accurate records for all appraisal assignments for a period of at least five years after preparation or At least two years❓❓ after final judicial action in any legal proceeding in which the appraiser provided testimony, whichever period expires last.

     Example: An appraiser must disclose any prior services provided regarding the subject property within the prior three years.

     Experiment: Consider the following experiment of ethics. Divide the group into smaller units, and then provide them with an ethics case study, so that the students can discuss the situation, based on USPAP standards, and then report their answers to the entire class.

  2. Competency Rule: The Competency Rule requires appraisers to:

     • Possess the Necessary Skills: Appraisers must have the knowledge and experience to perform the appraisal assignment competently.
     • Achieve Competency: If lacking necessary qualifications, an appraiser can take steps to gain competence, such as partnering with an experienced appraiser or completing relevant coursework.
     • Disclose Lack of Competency: Appraisers must disclose any lack of competency to the client before accepting the assignment.

     Example: A residential appraiser accepting an assignment to appraise a complex industrial property.

     Mathematical Formula: Competency (C) can be conceptualized as:

     C = K + E + T

     Where:

     • C = Competency Level
     • K = Knowledge (formal education, training)
     • E = Experience (practical application, mentorship)
     • T = Tools & Resources (access to data, software, expertise)

  3. Scope of Work Rule: The Scope of Work Rule outlines the depth of necessary research and reporting required for a credible appraisal. This includes:

     • Identifying the Problem: Clearly defining the appraisal assignment, including the intended use and client.
     • Determining the Scope: Deciding on the extent of data collection, analysis, and reporting necessary for credible results.
     • Disclosure: Disclosing the scope of work in the appraisal report.

     The depth of the Scope of Work depends on the complexity of the assignment and the needs of the client, and the client’s needs should not improperly influence the Scope of Work.

     Example: For a straightforward residential appraisal, the scope of work might involve a basic property inspection, a limited search for comparable sales, and a simple sales comparison analysis. For a complex commercial appraisal, the scope of work could entail extensive market research, detailed financial analysis, and multiple valuation approaches.

     Practical Application: Scope of Work (SoW) can be visualized using a Pareto Chart, where the most critical factors influencing the appraisal (e.g., data accuracy, market volatility) are identified and addressed with appropriate rigor. This helps prioritize efforts and ensures that the most significant elements are thoroughly analyzed.

  4. Jurisdictional Exception Rule: This rule acknowledges that local laws and regulations may sometimes conflict with USPAP requirements. In such cases, the jurisdictional exception allows for modifications to USPAP to comply with applicable legal requirements.

     Example: State laws requiring specific appraisal report formats or disclosure requirements.

• C. Maintaining USPAP Compliance: Appraisers must remain current with the latest editions of USPAP and any updates issued by the ASB. This can be achieved through continuing education courses, attending professional conferences, and regularly reviewing the Appraisal Foundation’s website (www.appraisalfoundation.org).

IV. Certification and Licensing Requirements

FIRREA mandates that appraisals for federally related transactions be performed by state-certified or state-licensed appraisers. The AQB sets minimum qualifications for licensing and certification, but individual states are responsible for managing the process.

• A. Levels of Appraiser Credentialing:

  1. Trainee Appraiser: Entry-level designation, typically requiring completion of specified coursework and supervision by a certified appraiser.

  2. Licensed Residential Appraiser: Qualified to appraise non-complex one-to-four unit residential properties with a transaction value below a specific threshold (as determined by state regulations).

  3. Certified Residential Appraiser: Qualified to appraise all one-to-four unit residential properties, regardless of transaction value or complexity.

  4. Certified General Appraiser: The highest level of certification, qualified to appraise all types of real property, including residential, commercial, industrial, and agricultural properties.

• B. Basic Education Requirements: (See Figure 14-3 in the original document for specific hour requirements).
  Applicants for different appraiser certifications require specified college credit hours.
  All applicants must complete a 15-Hour National USPAP course, or its equivalent.

• C. Examination Requirements: Applicants must pass a state-administered examination to demonstrate their knowledge of appraisal principles, practices, and USPAP.

• D. Experience Requirements: A specified number of hours of documented appraisal experience is required for certification, with the specific requirements varying depending on the level of certification.

  Mathematical Formula: Total Experience Hours (TEH) can be calculated as:

  TEH = Σ (Hours per Appraisal * Number of Appraisals)

  This formula helps track and verify the required number of experience hours.

V. Professional Appraisal Organizations

Several professional organizations contribute to the advancement of the appraisal profession by providing education, networking opportunities, and ethical guidance. Membership in these organizations can enhance an appraiser’s credibility and professional standing. Some of these organizations are included in Figure 14-2 in the original document.

• A. Examples of Professional Appraisal Organizations:

  • American Society of Appraisers (ASA)
  • Appraisal Institute (AI)
  • American Society of Farm Managers and Rural Appraisers (ASFMRA)
  • National Association of Independent Fee Appraisers (NAIFA)
  • Royal Institution of Chartered Surveyors (RICS)

• B. Benefits of Membership:

  • Continuing education opportunities
  • Access to industry resources and publications
  • Networking with other appraisers
  • Professional recognition and credibility

VI. Appraisal Management Companies (AMCs)

Appraisal Management Companies (AMCs) act as intermediaries between lenders and appraisers, managing the appraisal process to ensure independence and compliance.
Federal Guidelines now require banks to have a “firewall” between lenders and appraisers.

• A. Role of AMCs:

  • Selecting and assigning qualified appraisers
  • Managing appraisal orders and communication
  • Reviewing appraisal reports for compliance
  • Ensuring appraiser independence

• B. Regulatory Oversight: AMCs are subject to state and federal regulations to ensure transparency and prevent undue influence on appraisal valuations.

VII. Errors and Omissions Insurance

Errors and Omissions Insurance (E&O) protects appraisers from financial losses resulting from unintentional mistakes or omissions in their appraisal reports.

• A. Coverage: E&O insurance typically covers legal defense costs and damages awarded in lawsuits alleging negligence or errors in appraisal services.

• B. Importance: E&O insurance is essential for appraisers to mitigate the risks associated with professional liability.

VIII. Conclusion

Understanding and adhering to appraisal standards and professional practice guidelines is crucial for maintaining the integrity and credibility of the appraisal profession. By upholding ethical principles, maintaining competence, and staying current with industry developments, appraisers can provide reliable valuations that support sound financial decision-making. This chapter has provided a foundational understanding of the key elements of appraisal standards and professional practice, emphasizing the importance of ongoing education and adherence to the highest ethical standards.