Appraisal Standards and Professionalism

I. Introduction: The Cornerstone of Credibility

Professionalism and adherence to stringent appraisal standards are the bedrock upon which the real estate appraisal profession is built. This chapter delves into the critical aspects of these standards, exploring their scientific basis, practical application, and the ethical responsibilities they impose on appraisers. We will examine the evolution of appraisal standards, focusing on the Uniform Standards of Professional Appraisal Practice (USPAP), and explore the roles of key organizations like The Appraisal Foundation.

II. The Evolution of Appraisal Standards: From Self-Regulation to Legal Mandate

A. Pre-FIRREA Era: A Landscape of Limited Regulation

Prior to the late 1980s, the appraisal industry operated with minimal government oversight. While professional appraisal societies existed, their standards primarily applied to their members, leaving a significant portion of the field unregulated. This lack of uniform standards contributed to inconsistencies and, in some cases, unethical practices.

B. The Savings and Loan Crisis: A Catalyst for Change

The Savings and Loan (S&L) crisis of the 1980s exposed widespread issues within the appraisal industry. Questionable appraisal practices were identified as a contributing factor to the S&L failures, highlighting the need for greater regulation and standardized practices.

C. The Birth of USPAP and The Appraisal Foundation

In response to the crisis, nine professional appraisal associations united to create the Uniform Standards of Professional Appraisal Practice (USPAP). This initiative aimed to establish a common framework for appraisal development and reporting. Concurrently, these associations established The Appraisal Foundation, a non-profit organization dedicated to promoting professionalism and ensuring appraiser competence.

D. FIRREA: Codifying Standards into Law

The Financial Institutions Reform, Recovery, and Enforcement Act of 1989 (FIRREA) marked a turning point for the appraisal profession. FIRREA incorporated USPAP into law, mandating that states implement appraiser licensing and certification programs based on recognized competency standards.

E. The Appraisal Foundation’s Structure and Function

The Appraisal Foundation operates through several key boards:

1. Appraisal Standards Board (ASB): Responsible for developing, interpreting, and updating USPAP.
2. Appraiser Qualifications Board (AQB): Establishes minimum education, experience, and examination requirements for appraiser licensing and certification.
3. Appraisal Practices Board (APB): Focuses on codifying and promoting best practices within the appraisal profession.

III. Understanding and Applying USPAP: A Deep Dive

USPAP provides a comprehensive framework for ethical and competent appraisal practice. It consists of:

1. Preamble
2. Ethics Rule
3. Competency Rule
4. Scope of Work Rule
5. Jurisdictional Exception Rule
6. Definitions
7. Standards 1-10

A. General Principles: Ethics, Competency, and Scope of Work

The introductory section of USPAP lays the groundwork for ethical and professional conduct.

• Preamble: Sets the stage for the importance of integrity, objectivity, and independent judgement in appraisal practices.

• Ethics Rule: Mandates ethical conduct, emphasizing integrity, impartiality, and avoiding conflicts of interest. It also covers confidentiality and record-keeping requirements.

  • Example: An appraiser must disclose any prior relationship with the client or the property owner to avoid the appearance of bias.
  • Example: An appraiser must maintain confidentiality of appraisal results and client information, unless disclosure is required by law or authorized by the client.

• Competency Rule: Requires appraisers to possess the necessary knowledge and experience to perform an assignment competently. If an appraiser lacks competency in a specific area, they must disclose this to the client and take steps to achieve competency, such as partnering with a qualified appraiser.

  • Example: An appraiser specializing in residential properties should not accept an assignment to appraise a complex industrial facility without acquiring the necessary knowledge and expertise, potentially by collaborating with a certified general appraiser.

• Scope of Work Rule: Requires appraisers to determine the appropriate scope of work for an assignment, considering the intended use of the appraisal, the complexity of the property, and the availability of data. The scope of work must be sufficient to produce credible results.

  • Example: For a mortgage appraisal, the scope of work may include a detailed property inspection, analysis of comparable sales, and reconciliation of value indications. For a limited appraisal for tax assessment purposes, the scope of work may be less comprehensive.

• Jurisdictional Exception Rule: Allows appraisers to deviate from specific USPAP requirements if those requirements conflict with local laws or regulations. However, the appraiser must disclose the jurisdictional exception and its impact on the appraisal.

• Definitions: USPAP provides precise definitions of key appraisal terms (Market Value, Intended Use, etc.). These definitions must be strictly adhered to and override any alternative interpretations.

B. Standards and Standards Rules: A Framework for Appraisal Development and Reporting

USPAP outlines ten specific standards, each addressing a different aspect of appraisal practice.

• Standard 1: Real Property Appraisal, Development
  • Deals with the procedures to be followed in developing a real property appraisal. This standard encompasses various aspects, including identifying the problem, determining the scope of work, gathering data, applying appropriate valuation methods, and analyzing the information to arrive at a credible opinion of value.
• Standard 2: Real Property Appraisal, Reporting
  • Focuses on the requirements for communicating the results of a real property appraisal in a clear, accurate, and understandable manner. This standard specifies the content and format of appraisal reports, ensuring that they provide sufficient information for intended users to understand the appraiser’s opinions and conclusions.
• Standard 3: Appraisal Review, Development, and Reporting
  • Deals with the process of reviewing another appraiser’s work. An appraisal review involves examining an appraisal report to assess its completeness, accuracy, and compliance with USPAP.
• Standard 6: Mass Appraisal, Development, and Reporting
  • This standard applies to the development and reporting of mass appraisals, which are commonly used for ad valorem tax purposes.
• Standards 7 & 8: Personal Property Appraisal
• Standards 9 & 10: Business Appraisal

C. Statements on Appraisal Standards

The ASB issues Statements on Appraisal Standards to clarify, interpret, explain, or elaborate on existing standards rules. These statements have the same binding force as the other provisions of USPAP.

D. Advisory Opinions

Advisory Opinions are non-binding guidance issued by the ASB to illustrate the application of USPAP in specific situations. While not mandatory, they provide valuable insights into best practices.

IV. State Licensing and Certification: Ensuring Competence

A. The Role of State Regulatory Agencies

While FIRREA mandates appraiser licensing and certification, the actual implementation and management of these programs are handled by individual state regulatory agencies. Each state has its own laws and regulations governing appraiser qualifications and conduct. (See Figure 14-6 in the PDF).

B. Levels of Licensing and Certification

Most states offer different levels of licensing and certification, each with varying requirements for education, experience, and examination.

1. Trainee Appraiser: The entry-level license, requiring completion of basic appraisal coursework 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 below a specified threshold. Requires completion of specified coursework and passing an exam.
3. Certified Residential Appraiser: Authorizes appraisers to appraise more complex one-to-four unit residential properties, regardless of transaction value. Higher educational and experience requirements apply.
4. Certified General Appraiser: The highest level of certification, allowing appraisers to appraise all types of real property, including commercial, industrial, and agricultural properties. Requires the most extensive education, experience, and examination.

C. Minimum Requirements

The AQB establishes minimum requirements for education, experience, and examination for each level of appraiser licensure and certification. These requirements are regularly updated to reflect changes in the appraisal industry and best practices.
(See Figure 14-3, Figure 14-4 and Figure 14-5 in the PDF).

V. Professional Organizations and Ethical Codes: Upholding Standards

A. The Role of Appraisal Organizations

Professional appraisal organizations play a vital role in promoting ethical conduct, providing continuing education❓, and advocating for the interests of their members. Membership in such organizations can enhance an appraiser’s credibility and demonstrate a commitment to professionalism.

B. Examples of Appraisal Organizations (See page 408 in the PDF)

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

C. Ethical Codes

Many professional appraisal organizations have their own ethical codes that members are expected to adhere to. These codes typically address issues such as:

• Independence and Objectivity
• Confidentiality
• Competency
• Disclosure of Conflicts of Interest
• Compliance with USPAP

Example: See National Association of Independent Fee Appraisers Code of Ethics on page 432 in the PDF.

VI. Appraisal Management Companies (AMCs)

A. The Role of AMCs in the Appraisal Process

Appraisal Management Companies (AMCs) act as intermediaries between lenders and appraisers, managing the appraisal process to ensure independence and compliance with regulations.

B. Regulatory Requirements for AMCs

Federal regulations require lenders to utilize AMCs that meet specific requirements, including:

• Registration or licensing with the state.
• Independence from undue influence by lenders.
• Payment of customary and reasonable appraisal fees.
• Maintenance of a qualified appraiser panel.

VII. Maintaining Professionalism: A Continuous Journey

A. Continuing Education

Appraisers are required to complete continuing education courses to stay abreast of changes in USPAP, appraisal techniques, and market conditions.

B. Staying Informed

Appraisers should actively engage with industry publications, attend professional development events, and participate in peer review programs to maintain their knowledge and skills.

C. Ethical Decision-Making

Appraisers must consistently exercise sound ethical judgment in all aspects of their practice, prioritizing integrity, objectivity, and the public trust.

VIII. Conclusion: The Appraiser as a Trusted Professional

Adherence to appraisal standards and ethical conduct are essential for maintaining the integrity and credibility of the appraisal profession. By upholding these principles, appraisers can provide reliable opinions of value that support sound financial decision-making and contribute to the stability of the real estate market.

IX. Key Equations and Concepts

While appraisal is not solely a mathematical science, quantitative methods underpin many valuation techniques. Here are some relevant formulas:

• Gross Rent Multiplier (GRM): GRM = Sale Price / Gross Rent
• Direct Capitalization Rate (R): R = Net Operating Income (NOI) / Property Value
• Discounted Cash Flow (DCF):
  • Value = Σ [CFt / (1 + r)^t], where:
    • CFt = Cash flow in period t
    • r = Discount rate
    • t = Time period

These formulas are tools that appraisers use, but they are always applied within the context of market analysis, property inspection, and professional judgment as outlined in USPAP.

X. Practical Application & Related “Experiments”

1. Scope of Work Exercise: Provide hypothetical appraisal scenarios with varying property types (single-family, commercial, land). Have trainees define an appropriate scope of work for each, justifying their choices based on USPAP. Discuss differences in research, data verification, and report requirements.

2. Ethics Case Studies: Present realistic ethical dilemmas faced by appraisers (e.g., pressure from a client to inflate value, undisclosed conflict of interest). Have trainees analyze the situations using the USPAP Ethics Rule and discuss appropriate courses of action.

3. Review Appraisal Assignment: Trainees review a sample appraisal report, identifying potential USPAP violations or areas where the report could be improved in terms of clarity, support, and credibility.

XI. Chapter Summary

(Provided in the original document)