Appraisal Standards and Professional Practice: Introduction

This chapter, “Appraisal Standards and Professional Practice,” within the broader context of “Real Estate Interests and Valuation: A Comprehensive Guide,” delves into the critical framework governing the conduct and competency of real estate appraisers. The valuation of real estate interests is a complex process grounded in economic theory, statistical analysis, and legal precedent. However, the integrity of valuation outcomes hinges on the appraiser’s adherence to standardized practices and ethical guidelines. This chapter elucidates these standards and their scientific importance in ensuring reliable and unbiased property valuations.

The scientific importance of standardized appraisal practices lies in their ability to mitigate subjectivity and bias in the valuation process. By providing a structured methodology for data collection, analysis, and reporting, appraisal standards enhance the reliability and reproducibility of valuation results. These standards, particularly the Uniform Standards of Professional Appraisal Practice (USPAP), promote transparency and consistency, contributing to the stability and efficiency of real estate markets and safeguarding the interests of stakeholders, including financial institutions, investors, and property owners. Furthermore, professional ethical guidelines ensure appraisers act with objectivity, integrity, and independence, preventing conflicts of interest and promoting public trust in the appraisal profession.

The educational goals of this chapter are multifaceted. Upon completion, the student will be able to:

1. Identify and understand the key components of the Uniform Standards of Professional Appraisal Practice (USPAP) and their scientific rationale for ensuring credible valuation results.
2. Differentiate between the roles and responsibilities of the Appraisal Standards Board (ASB) and the Appraiser Qualifications Board (AQB) and their impact on the professional development and regulation of appraisers.
3. Explain the significance of appraiser licensing and certification requirements in promoting competency and safeguarding the public interest.
4. Analyze the ethical obligations of appraisers regarding conduct, management, confidentiality, and record keeping and their role in maintaining the integrity of the valuation process.
5. Evaluate the impact of appraisal management companies (AMCs) on the appraisal profession and the mortgage process and the role they play in ensuring appraiser independence.
6. Assess the importance of continuing education and professional development in maintaining competency and adapting to evolving appraisal practices and regulatory requirements.

By mastering these concepts, students will gain a comprehensive understanding of the appraisal standards and professional practice, enabling them to critically evaluate appraisal reports, assess the qualifications and conduct of appraisers, and contribute to the integrity and reliability of real estate valuation processes.

Appraisal Standards and Professional Practice

I. Introduction: The Foundation of Appraisal Practice

The valuation of real estate interests is a complex process requiring a high degree of skill, knowledge, and ethical conduct. The appraisal profession operates under a framework of standards and guidelines designed to ensure objectivity, accuracy, and consistency in appraisal practice. This chapter delves into the core principles of appraisal standards and professional practice, focusing on the Uniform Standards of Professional Appraisal Practice (USPAP) and the role of the Appraisal Foundation. Understanding these principles is critical for anyone involved in the appraisal process, from novice trainees to seasoned professionals.

II. The Need for Appraisal Standards: A Historical Perspective

Prior to the late 20th century, the appraisal profession lacked a unified and consistently enforced set of standards. This deficiency contributed to significant problems in the financial industry, most notably the Savings and Loan (S&L) crisis of the 1980s. Questionable appraisal practices, often influenced by external pressures, led to inflated property values and ultimately, the collapse of many financial institutions. This crisis highlighted the critical need for independent, reliable, and standardized appraisal practices.

III. Key Organizations and Their Roles

Several organizations play pivotal roles in setting and enforcing appraisal standards:

• The Appraisal Foundation (TAF): A non-profit organization dedicated to promoting professionalism within the appraisal industry. TAF oversees the development and promulgation of USPAP. It also oversees the Appraiser Qualifications Board (AQB) and the Appraisal Standards Board (ASB).
• The Appraisal Standards Board (ASB): An independent board within TAF responsible for developing, interpreting, and revising USPAP. The ASB issues Statements on Appraisal Standards and Advisory Opinions to clarify and provide guidance on USPAP application.
• The Appraiser Qualifications Board (AQB): An independent board within TAF that establishes minimum education, experience, and examination requirements for appraiser licensing and certification.
• Appraisal Practices Board (APB): A board within TAF that identifies and promotes best practices in valuation.

Figure 1. Interrelationship of Key Appraisal Organizations

                  The Appraisal Foundation (TAF)
                       |
        --------------------------------------------------
        |                              |                 |
Appraisal Standards Board (ASB)   Appraiser Qualifications Board (AQB)    Appraisal Practices Board (APB)
(Develops & Interprets USPAP)   (Sets Qualification Criteria)            (Promotes Best Practices)

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

USPAP represents the cornerstone of appraisal standards in the United States. It establishes ethical and performance guidelines for appraisers, promoting public trust in appraisal services. USPAP is reviewed and updated regularly to reflect changes in the appraisal profession and the real estate market.

A. Structure of USPAP

USPAP is comprised of several key components:

1. Preamble: Provides an overview of USPAP’s purpose and scope. It sets the stage for the ethical and competency requirements that follow.

2. Ethics Rule: Encompasses requirements related to conduct, management❓❓, confidentiality and record keeping.

   • Conduct: Requires appraisers to act ethically and avoid misleading or fraudulent behavior.
   • Management: Addresses business practices, prohibiting contingent fees and requiring disclosure of referral fees.
   • Confidentiality: Protects client information, limiting disclosure to authorized parties.
   • Record Keeping: Mandates the retention of workfiles for a specified period (generally five years after preparation or at least two years after final disposition of any judicial proceeding in which the appraiser provided testimony related to the assignment).

3. Competency Rule: Requires appraisers to possess the necessary knowledge and experience to complete an assignment competently. If lacking competency initially, an appraiser must take steps to acquire it, which might include partnering with a competent appraiser or disclosing the lack of expertise to the client and taking necessary steps to complete the appraisal competently.

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

   • The scope of work includes:
     • Identifying the problem to be solved
     • Determining the scope of work necessary to develop credible assignment results
     • Disclosing the scope of work in the report.
   • The appraiser must not allow the intended use, intended user, client desires, or assignment conditions to limit the scope of work to such a degree that the assignment results are not credible.

5. Jurisdictional Exception Rule: Allows for deviations from USPAP when required by applicable laws or regulations.

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

7. Standards 1-10: Address specific appraisal disciplines and tasks:

   • Standards 1 & 2: Real Property Appraisal, Development and Reporting: These standards outline the procedures for developing and communicating a real property appraisal. They cover topics such as identifying the problem, determining the scope of work, collecting and analyzing data, applying appropriate valuation methods, and preparing a clear and accurate report.
   • Standard 3: Appraisal Review, Development, and Reporting: Focuses on the process of reviewing another appraiser’s work.
   • Standards 4 & 5: Retired in 2016.
   • Standard 6: Mass Appraisal, Development, and Reporting: Addresses appraisals for ad valorem tax purposes. Mass appraisal involves valuing a large number of properties simultaneously using standardized procedures and statistical modeling.
   • Standards 7 & 8: Personal Property Appraisal, Development, and Reporting: Cover the appraisal of tangible personal property, such as antiques, collectibles, and machinery.
   • Standards 9 & 10: Business Appraisal, Development, and Reporting: Address the valuation of businesses and business interests.

8. Statements on Appraisal Standards (SAS): Interpret, explain, or elaborate upon the standards. They have the same binding force as other provisions of USPAP.

9. Advisory Opinions (AO): Offer guidance on applying USPAP in specific situations. They are not binding but provide valuable insights.

B. Key Principles Within USPAP

Several underlying principles guide appraisal practice under USPAP:

• Impartiality and Objectivity: Appraisers must perform assignments without bias or prejudice, basing their conclusions solely on factual data and sound analysis.
• Independence: Appraisers must be free from undue influence from clients, lenders, or other parties with a vested interest in the appraisal outcome.
• Confidentiality: Appraisers must protect client information and assignment results from unauthorized disclosure.
• Competency: Appraisers must possess the necessary knowledge, skills, and experience to perform assignments competently.
• Credibility: The assignment results must be believable and based on the correct analysis, data, and methods.

C. Practical Application: Examples and Experiments

1. Sales Comparison Approach and Adjustment Analysis:

   • Concept: The Sales Comparison Approach is based on the principle that a property’s value can be estimated by comparing it to similar properties that have recently sold. Adjustments are made to the sale prices of comparable properties to account for differences between them and the subject property.

   • Formula:

     • Adjusted Sale Price (ASP) = Sale Price (SP) +/- Dollar or Percentage Adjustment.

   • Experiment:

     • Scenario: An appraiser is valuing a 3-bedroom, 2-bath house with a 2-car garage in a suburban neighborhood. They identify three comparable sales:

       • Comparable 1: 3 bedrooms, 2 baths, 2-car garage; Sold for $300,000
       • Comparable 2: 3 bedrooms, 1 bath, 2-car garage; Sold for $280,000
       • Comparable 3: 4 bedrooms, 2 baths, 2-car garage; Sold for $320,000

     • Adjustment Process: The appraiser determines that a bedroom is worth $10,000 and a bathroom is worth $5,000 in this market.

       • Comparable 1: No adjustments needed. ASP = $300,000
       • Comparable 2: Add $5,000 (for the additional bath). ASP = $285,000
       • Comparable 3: Subtract $10,000 (for the additional bedroom). ASP = $310,000

     • Analysis: Based on these adjusted sale prices, the appraiser may reconcile the values to arrive at an opinion of value.
       2. Cost Approach and Depreciation:

   • Concept: The Cost Approach estimates value by calculating the cost to reproduce or replace a property, minus depreciation.

   • Formula:

     • Value = Cost of New - Accrued Depreciation + Land Value

   • Experiment:

     • Scenario: The appraiser is valuing a 20-year-old commercial building.

       • Reproduction Cost (Cost of New): Assume reproduction cost = $500,000
       • Land Value: Assume Land Value = $100,000
       • Accrued Depreciation: The appraiser estimates:
         • Physical deterioration: $50,000
         • Functional obsolescence: $20,000
         • External obsolescence: $10,000

     • Calculation:

       • Total Depreciation = $50,000 + $20,000 + $10,000 = $80,000
       • Value = $500,000 - $80,000 + $100,000 = $520,000

D. Common USPAP Violations

Appraisers must be vigilant in avoiding USPAP violations. Some common violations include:

• Lack of Competency: Accepting assignments without the necessary knowledge or experience.
• Failure to Properly Disclose: Not disclosing pertinent information like prior services, conflicts of interest, or limited scope of work.
• Improper Scope of Work: Conducting insufficient research or analysis to reach credible conclusions.
• Bias: Allowing personal or external pressures to influence appraisal results.
• Confidentiality Breaches: Disclosing client information without authorization.
• Record Keeping Deficiencies: Failing to maintain adequate workfiles.

V. Licensing and Certification

State appraisal boards are responsible for licensing and certifying appraisers. Licensing and certification requirements vary by state but generally include:

• Education: Completion of specific appraisal courses and, in some cases, a college degree (as stipulated by the AQB Criteria). The AQB’s Real Property Appraisal Qualification Criteria outlines minimum college education requirements for a licensed or certified appraiser.
• Experience: Accumulation of a specified number of appraisal hours under the supervision of a certified appraiser.
• Examination: Passing a state-administered appraisal examination.
• Continuing Education: Completion of continuing education courses to maintain licensure or certification.

A. Types of Appraiser Credentials

• Trainee Appraiser: Entry-level license for those beginning their appraisal career. Requires supervision by a certified appraiser.
• Licensed Residential Appraiser: Authorized 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.
• Certified Residential Appraiser: Authorized to appraise one-to-four unit residential properties without regard to transaction value or complexity.
• Certified General Appraiser: Authorized to appraise all types of real property.

B. Reciprocity

Some states offer reciprocity agreements, allowing appraisers licensed or certified in one state to obtain a license or certification in another.

VI. Ethical Considerations Beyond USPAP

While USPAP provides a framework for ethical conduct, appraisers should also adhere to a broader set of ethical principles:

• Integrity: Being honest and truthful in all professional dealings.
• Professionalism: Maintaining a high standard of conduct and competence.
• Respect: Treating clients, colleagues, and the public with courtesy and consideration.
• Public Trust: Recognizing that the appraisal profession plays a vital role in protecting the public interest.

VII. Professional Appraisal Organizations

Several professional appraisal organizations offer membership and designations. These organizations often provide educational opportunities, networking opportunities, and promote ethical conduct. Examples include:

• American Society of Appraisers (ASA):
• American Society of Farm Managers and Rural Appraisers (ASFMRA):
• Appraisers Association of America (AAA):
• International Society of Appraisers (ISA):
• National Association of Independent Fee Appraisers (NAIFA):
• Royal Institution of Chartered Surveyors (RICS): (International Sponsor)
• Massachusetts Board of Real Estate Appraisers (MBREA):
• Columbia Society of Real Estate Appraisers:
• International Association of Assessing Officers (IAAO):
• International Right of Way Association (IRWA):
• North Carolina Professional Appraisers Coalition:

VIII. The Role of Appraisal Management Companies (AMCs)

Appraisal Management Companies (AMCs) act as intermediaries between lenders and appraisers. AMCs manage the appraisal process, ensuring appraiser independence and compliance with regulations. They often have a panel of appraisers they utilize for assignments. Regulations require lenders to maintain a “firewall” to avoid influencing the appraisal process.

IX. Errors and Omissions (E&O) Insurance

Appraisers should carry Errors and Omissions (E&O) insurance to protect themselves against liability for mistakes or omissions in their work. Note: Errors and Omissions Insurance does not cover Errors of Commission, or intentional misrepresentation.

X. Consequences of Non-Compliance

Failure to comply with USPAP and other appraisal standards can result in:

• Disciplinary Actions: Suspension or revocation of appraiser licenses or certifications by state appraisal boards.
• Legal Liability: Lawsuits from clients or other parties who suffer damages as a result of negligent or fraudulent appraisal practices.
• Professional Sanctions: Censure or expulsion from professional appraisal organizations.
• Damage to Reputation: Loss of trust and credibility within the appraisal profession and the community.

XI. Resources and Further Learning

• The Appraisal Foundation: www.appraisalfoundation.org
• State Appraisal Boards: (See Figure 14-6 in the included PDF for a state-by-state list.)
• Professional Appraisal Organizations: (See a list of professional appraisal sponsors of the Appraisal Foundation in the included PDF).

XII. Conclusion

Adherence to appraisal standards and ethical practices is paramount for maintaining the integrity and credibility of the appraisal profession. By understanding and applying the principles outlined in USPAP, appraisers can provide reliable and unbiased valuations that support sound decision-making in the real estate market. Continuous learning and professional development are essential for staying abreast of evolving standards and best practices.