Appraisal Standards, Licensing & the Appraisal Foundation

Chapter 14: Appraisal Standards, Licensing & the Appraisal Foundation

I. Introduction: The Foundation of Appraisal Practice

Real estate appraisal is a profession that relies on rigorous standards and ethical conduct to ensure accurate and unbiased property valuations. This chapter delves into the core components of the appraisal landscape, specifically examining appraisal standards, licensing requirements, and the pivotal role of The Appraisal Foundation. Understanding these elements is crucial for aspiring and practicing appraisers alike, as they collectively shape the integrity and reliability of the valuation process.

II. The Appraisal Foundation: A Cornerstone of Appraisal Standards

A. Historical Context and Formation
1. The Appraisal Foundation (TAF) emerged in 1987 in response to the Savings and Loan (S&L) crisis of the 1980s. This crisis exposed vulnerabilities in the appraisal industry, highlighting the need for standardized practices and qualifications.
2. Nine professional appraisal organizations united to establish TAF, a non-profit organization dedicated to promoting professionalism and public trust in the appraisal profession. These founding organizations were the American Institute of Real Estate Appraisers, the American Society of Appraisers, the American Society of Farm Managers and Rural Appraisers, the Appraisal Institute of Canada, the International Association of Assessing Officers, the International Right-of-Way Association, the National Association of Independent Fee Appraisers, the National Society of Real Estate Appraisers, and the Society of Real Estate Appraisers.

B. Mission and Objectives
1. TAF’s primary mission is to foster professionalism within the appraisal industry. It achieves this by:
a. Ensuring that appraisers are adequately qualified to provide competent services.
b. Promoting the uniform standards❓ of Professional Appraisal Practice (USPAP).
c. Educating the public about the importance of accurate and reliable appraisals.

C. Organizational Structure
TAF operates through three independent boards:
1. The Appraisal Standards Board (ASB): Responsible for developing, interpreting, and updating USPAP.
2. The Appraiser Qualifications Board (AQB): Establishes minimum education, experience, and examination requirements for appraiser licensing and certification.
3. The Appraisal Practices Board (APB): Identifies and promotes best practices in the appraisal profession.

III. Uniform Standards of Professional Appraisal Practice (USPAP)

A. What is USPAP?

USPAP represents the generally recognized ethical and performance standards for the appraisal profession in the United States. It is not a law itself, but it is often incorporated into state and federal regulations, making it legally binding for appraisers in many jurisdictions.

B. Key Components of USPAP

1. Preamble: Sets forth the purpose and rationale for USPAP, emphasizing the importance of public trust and ethical conduct.
2. Ethics Rule: Establishes ethical obligations for appraisers, including requirements for impartiality, objectivity, and confidentiality. It addresses issues related to conduct, management, and record-keeping.
3. Competency Rule: Requires appraisers to possess the necessary knowledge and experience to perform an appraisal assignment competently. If an appraiser lacks competency, they must either decline the assignment or take steps to achieve competency through education, mentoring, or consultation.
4. Scope of Work Rule: The Scope of Work Rule dictates that the appraiser must identify the problem to be solved, determine the scope of work necessary to solve the problem and then correctly complete the assignment.
5. Jurisdictional Exception Rule: Allows for deviations from USPAP requirements when compliance would violate applicable law or public policy. This exception is narrowly applied and requires clear disclosure in the appraisal report.
6. Definitions: Provides precise definitions for key terms used throughout USPAP.
7. Standards Rules: There are currently 10 Standards in USPAP, each with specific Standard Rules. These Standards outline the requirements for developing and reporting various types of appraisal assignments. The main Real Property Standards Rules are:
   • Standard 1: Development of Real Property Appraisal
   • Standard 2: Reporting of Real Property Appraisal

C. Modifications and Updates

1. The ASB is responsible for updating USPAP on an annual basis to reflect changes in the appraisal profession and legal/regulatory requirements.
2. Appraisers must stay informed of the latest USPAP revisions to ensure compliance.
3. Updates are typically issued annually and made available through TAF.

D. Enforcement and Consequences of Non-Compliance

1. Enforcement of USPAP is primarily the responsibility of state appraiser regulatory agencies.
2. Violations of USPAP can result in disciplinary actions, including suspension or revocation of an appraiser’s license or certification.

IV. Appraiser Licensing and Certification

A. Role of the Appraiser Qualifications Board (AQB)

1. The AQB establishes the minimum criteria for appraiser licensing and certification.
2. These criteria include education, experience, and examination requirements.
3. States must meet or exceed the AQB’s minimum criteria.

B. Appraiser Qualification Criteria

1. Trainee Appraiser: This is the entry-level for individuals pursuing an appraisal career. Requirements vary by state, but generally include completion of a minimum number of qualifying education hours and supervision by a certified appraiser.

2. Licensed Residential Appraiser: Allows appraisers to appraise non-complex one-to-four unit residential properties with transaction values less than \$1,000,000, and complex one-to-four unit residential properties with transaction values less than \$400,000.

3. Certified Residential Appraiser: Allows appraisers to appraise one-to-four unit residential properties, regardless of transaction value or complexity. Requires a bachelor’s degree.

4. Certified General Appraiser: The highest level of appraiser certification. Allows appraisers to appraise all types of real property, including residential, commercial, industrial, and agricultural properties. Requires a bachelor’s degree.

C. Educational Requirements

1. The AQB sets minimum educational requirements for each appraiser level, including specific courses in appraisal principles, practices, and ethics.
2. Coursework must be completed through AQB-approved education providers.
3. College degree requirements vary by certification level. Residential requires an associate’s degree. Certified Residential and Certified General require a Bachelor’s degree.

D. Experience Requirements

1. Applicants must accumulate a certain number of experience hours under the supervision of a certified appraiser.
2. The required number of hours varies depending on the desired certification level.
3. Experience must be relevant to the type of appraisal work the applicant intends to perform.

E. Examination Requirements

1. Applicants must pass a state-administered examination to demonstrate their knowledge of appraisal principles, practices, and USPAP.
2. The examination content is based on the AQB’s National Uniform Examination Content Outline.

F. Continuing Education

1. Licensed and certified appraisers must complete continuing education courses on a regular basis to maintain their credentials.
2. Continuing education ensures that appraisers stay current with changes in appraisal standards, regulations, and industry best practices.

V. The Role of State Regulatory Agencies

A. Licensing and Certification Authority

1. State appraiser regulatory agencies are responsible for licensing and certifying appraisers within their respective jurisdictions.
2. These agencies enforce state appraisal laws and regulations.

B. Compliance Monitoring and Enforcement

1. State agencies monitor appraiser compliance with USPAP and other applicable requirements.
2. They investigate complaints against appraisers and take disciplinary actions when warranted.
3. Disciplinary actions can include fines, suspensions, or revocation of licenses/certifications.

VI. Appraisal Management Companies (AMCs)

A. Definition and Function

An Appraisal Management Company (AMC) acts as an intermediary between lenders and appraisers. AMCs manage the appraisal process, ensuring compliance with regulations and maintaining appraiser independence.

B. Regulatory Requirements

1. The Dodd-Frank Wall Street reform❓ and Consumer Protection Act of 2010 established federal requirements for AMCs.
2. Many states have also enacted laws to regulate AMCs.

C. Independence Requirements

1. AMCs must ensure that appraisers are selected on a random basis and that lenders do not unduly influence the appraisal process.
2. This helps to maintain appraiser objectivity and prevent biased valuations.

VII. Ethical Considerations in Appraisal Practice

A. Importance of Impartiality and Objectivity

1. Appraisers must maintain impartiality and objectivity in all appraisal assignments.
2. They must avoid conflicts of interest and any appearance of bias.

B. Disclosure Requirements

1. Appraisers must disclose any known conflicts of interest or other factors that could affect their impartiality.
2. They must also disclose any extraordinary assumptions or hypothetical conditions used in the appraisal.

C. Confidentiality Obligations

1. Appraisers must maintain the confidentiality of client information and appraisal results.
2. They can only disclose confidential information with the client’s consent or when required by law.

D. Contingent Fees

1. Contingent fees, which are based on the outcome of an appraisal, are generally prohibited by USPAP.
2. This helps to prevent appraisers from being influenced by the client’s desired valuation.

VIII. Professional Appraisal Organizations

A. Role and Purpose

1. Professional appraisal organizations provide education, networking opportunities, and resources for appraisers.
2. They also promote ethical conduct and professional standards.

B. Examples of Professional Organizations

1. Appraisal Institute (AI): One of the largest and most well-respected appraisal organizations.
2. American Society of Appraisers (ASA): A multi-discipline appraisal organization with members who appraise real estate, personal property, and business assets.
3. National Association of Independent Fee Appraisers (NAIFA): An organization dedicated to promoting the interests of independent fee appraisers.
4. Royal Institution of Chartered Surveyors (RICS): An international professional body, promoting and enforcing the highest international standards in the valuation, management and development of land, real estate, construction and infrastructure.

C. Benefits of Membership

1. Professional development opportunities
2. Access to industry research and publications
3. Networking with other appraisers
4. Enhanced professional credibility

IX. Mathematical and Statistical Concepts

While USPAP and licensing requirements are primarily regulatory and procedural, a strong understanding of mathematical and statistical concepts is crucial for competent appraisal practice. These concepts underpin the methodologies used in valuation.

A. Discounted Cash Flow Analysis (DCF)

DCF analysis is frequently used in income property appraisals. It relies on present value calculations to estimate the value of future cash flows.

1. Formula:

   • PV = CF1 / (1+r)^1 + CF2 / (1+r)^2 + … + CFn / (1+r)^n

     • PV = Present Value
     • CFt = Cash Flow in Period t
     • r = Discount Rate
     • n = Number of Periods

2. Example:

   Suppose a commercial property is expected to generate \$50,000 in net operating income (NOI) per year for the next 5 years, and the required rate of return (discount rate) is 10%. To calculate the present value (PV) of these cash flows:

   • PV = 50,000 / (1+0.10)^1 + 50,000 / (1+0.10)^2 + 50,000 / (1+0.10)^3 + 50,000 / (1+0.10)^4 + 50,000 / (1+0.10)^5
   • PV ≈ \$189,539.32

B. Regression Analysis

Regression analysis is used to develop statistical models for predicting property values based on various characteristics (e.g., size, location, amenities).

1. Simple Linear Regression:

   • y = a + bx

     • y = Dependent Variable (e.g., sale price)
     • x = Independent Variable (e.g., square footage)
     • a = Intercept
     • b = Slope

2. Multiple Linear Regression:

   • y = a + b1x1 + b2x2 + … + bnxn

     • y = Dependent Variable (e.g., sale price)
     • x1, x2, …, xn = Independent Variables (e.g., square footage, number of bedrooms, location score)
     • a = Intercept
     • b1, b2, …, bn = Coefficients for each independent variable

3. Practical Application:

   An appraiser analyzes sales data and finds the following regression equation:

   • Sale Price = 50,000 + 150 * Square Footage

   This means for every additional square foot, the sale price increases by \$150. A house with 1,500 square feet would have a predicted sale price of:

   • Sale Price = 50,000 + 150 * 1500 = \$275,000

C. Statistical Measures for Data Analysis

Various statistical measures are used to analyze data sets in appraisals:

1. Mean: The average value of a set of numbers. Mean = (Sum of all values) / (Number of values).

   Example: For the sales prices: \$250,000, \$275,000, and \$300,000, the mean is (\$250,000 + \$275,000 + \$300,000) / 3 = \$275,000.

2. Median: The middle value in a sorted set of numbers. If there’s an even number of values, it’s the average of the two middle values.

   Example: For the same sales prices, the median is \$275,000 because it’s the middle value.

3. Standard Deviation: A measure of the amount of variation or dispersion of a set of values. A low standard deviation indicates that the values tend to be close to the mean, while a high standard deviation indicates that the values are spread out over a wider range.

   Formula:

   • σ = sqrt[ Σ (xi - μ)^2 / N ]

     • xi = Each value in the data set
     • μ = The mean of the data set
     • N = Number of values in the data set

D. Practical Experiments

To reinforce these concepts, appraisers can conduct practical experiments:

1. Regression Analysis Experiment:

   • Gather sales data for a specific neighborhood, including sale prices, square footage, number of bedrooms, number of bathrooms, and lot size.

   • Use statistical software (e.g., Excel, R) to perform a multiple linear regression.

   • Analyze the results, noting the coefficients for each variable and the R-squared value, which indicates the goodness of fit of the model.

   • Use the regression equation to predict sale prices for several properties and compare the predictions to actual sale prices.

2. DCF Analysis Experiment:

   • Select a commercial property and project its net operating income (NOI) for the next 10 years.

   • Determine a reasonable discount rate based on market conditions and risk factors.

   • Use the DCF formula to calculate the present value of the projected cash flows.

   • Vary the discount rate to see how it affects the present value.

X. Emerging Trends and Challenges

A. Technological Advancements

1. Automated Valuation Models (AVMs) and other technological tools are increasingly being used in the appraisal process.
2. Appraisers must understand how to effectively use these tools while maintaining compliance with USPAP.

B. Data Analytics and Big Data

1. Appraisers need to be proficient in data analytics to extract meaningful insights from large datasets.
2. This can help them to identify market trends and support their valuation conclusions.

C. Sustainability and Green Building

1. Sustainable building practices and green building certifications are becoming increasingly important in real estate.
2. Appraisers need to understand how to value these features and their impact on property values.

D. Regulatory Changes

1. The appraisal industry is subject to ongoing regulatory changes at the federal and state levels.
2. Appraisers must stay informed of these changes and adapt their practices accordingly.

XI. Chapter Summary

This chapter provided a comprehensive overview of the regulatory and ethical framework that governs the appraisal profession. Key takeaways include:

• The Appraisal Foundation (TAF) plays a central role in establishing and promoting appraisal standards and qualifications.
• The Uniform Standards of Professional Appraisal Practice (USPAP) sets forth the ethical and performance standards for appraisers.
• Appraiser licensing and certification are regulated at the state level, subject to minimum criteria established by the AQB.
• Appraisal Management Companies (AMCs) serve as intermediaries between lenders and appraisers, ensuring compliance and appraiser independence.
• Ethical conduct, including impartiality, objectivity, and confidentiality, is paramount in appraisal practice.
• Professional appraisal organizations offer education, networking, and resources for appraisers.
• A strong background in mathematical and statistical concepts is important to performing competent appraisal practice.
• Appraisers must stay informed of emerging trends and challenges in the industry, including technological advancements, data analytics, and regulatory changes.

Understanding these elements is crucial for maintaining the integrity and reliability of the appraisal profession and protecting the public interest.