Foundations of Real Estate Appraisal: Profession, Regulation, and Ethics

Chapter 1: Foundations of Real Estate Appraisal: Profession, Regulation, and Ethics

Introduction

This chapter provides a foundational understanding of the real estate appraisal profession, its regulatory framework, and the ethical considerations that govern its practice. We will explore the historical context that led to the formalization of appraisal regulation, examine the roles of key organizations involved in setting standards and ensuring compliance, and delve into the ethical principles that guide appraisers in providing unbiased and credible opinions of value.

1. The Appraisal Profession: A Historical Perspective

1.1 Pre-Regulation Era:

Before the late 20th century, the appraisal profession lacked standardized regulation. Anyone could claim to be an appraiser, leading to inconsistencies in quality and potential conflicts of interest. Designations from professional organizations were the primary means of identifying qualified appraisers, but public awareness and understanding of these designations were limited.

1.2 The Savings and Loan Crisis and FIRREA:

The Savings and Loan Crisis of the 1980s exposed significant weaknesses in appraisal practices, contributing to widespread financial instability. In response, Congress enacted the Financial Institutions Reform, Recovery, and Enforcement Act (FIRREA) of 1989.

FIRREA’s Key Provisions:

• Restricted appraisals for federally related transactions (FRTs) to state-licensed or state-certified appraisers. An FRT is defined as any real estate-related financial transaction that a Federal Financial Institutions Regulatory Agency (FFIRA) engages in, contracts for, or regulates, and that requires the services of an appraiser.

• Mandated the establishment of state appraisal regulatory agencies.

• Created The Appraisal Foundation (TAF) to set appraisal standards and qualifications.

1.3 The Appraisal Institute:

The Appraisal Institute, formed in 1991 through the unification of the Society of Real Estate Appraisers and the American Institute of Real Estate Appraisers (AIREA), represents a significant step toward professional standardization.

2. The Regulatory Framework: Key Organizations and Their Roles

2.1 The Appraisal Foundation (TAF):

TAF is a non-profit organization responsible for setting appraisal standards and qualifications. It operates through two independent boards:

2.1.1 Appraiser Qualifications Board (AQB):

The AQB establishes the minimum education, experience, and examination requirements for appraiser licensing and certification. It defines the content of appraiser qualifying and continuing education. A significant curriculum overhaul took effect in 2008. The goal of the AQB is to ensure that appraisers have the knowledge and skills necessary to perform competent appraisals.

Example:
An appraiser seeking a Certified General Appraiser❓❓ license may be required to complete a minimum number of classroom hours in specified topics, such as valuation principles, appraisal procedures, and report writing, as determined by the AQB. Furthermore, the AQB dictates minimum experience hours.

2.1.2 Appraisal Standards Board (ASB):

The ASB develops, interprets, and revises the Uniform Standards of Professional Appraisal Practice (USPAP). USPAP is the ethical and performance standards for appraisers. While USPAP itself does not have legal authority, it becomes legally binding when adopted by state and federal agencies.

Example:
USPAP Standard 1 requires appraisers to develop an appraisal that is credible for its intended use. This involves identifying the problem, determining the scope of work, and gathering and analyzing relevant data. The ASB periodically issues Advisory Opinions to clarify USPAP requirements and address emerging issues in the appraisal profession.

2.2 The Appraisal Subcommittee (ASC):

The ASC, part of the Federal Financial Institutions Examination Council (FFIEC), oversees state appraisal regulatory programs to ensure compliance with FIRREA. The ASC monitors state appraiser licensing and certification programs, conducts audits, and has the authority to decertify state programs that fail to meet federal requirements.

3. State Appraiser Licensing and Certification

3.1 License Levels:

Most states offer several levels of appraiser licensure, each with specific requirements and scope of practice:

3.1.1 Trainee, Registered, or Associate Appraiser:
Entry-level classification requiring supervision by a licensed or certified appraiser. Scope of practice may be limited.

3.1.2 Licensed Residential Appraiser:
Typically authorized to appraise one- to four-unit residential properties with transaction values below a specified threshold (e.g., $1 million).

3.1.3 Certified Residential Appraiser:
Authorized to appraise one- to four-unit residential properties without transaction value limits.

3.1.4 Certified General Appraiser:
The highest level of certification, authorizing appraisers to appraise all types of properties, regardless of value or complexity.

3.2 Competency:
Licensure or certification alone does not guarantee competency. Appraisers must possess the necessary knowledge and experience to competently appraise specific types of properties in specific locations.
Example: A Certified General Appraiser specializing in commercial properties may lack the expertise to appraise a complex agricultural property.

4. Ethics for Appraisers

4.1 Impartiality and Objectivity:

Appraisers must maintain impartiality and objectivity in their work. Unlike advocates, who represent the interests of their clients, appraisers have an obligation to provide unbiased opinions of value to all intended users of their appraisal reports.

4.2 Conflicts of Interest:
Appraisers must avoid conflicts of interest that could compromise their objectivity. This includes declining assignments where they have a personal or financial interest in the property or parties involved.

Example: An appraiser should not accept an appraisal assignment from a close family member if the outcome of the appraisal could directly benefit the family member financially.

4.3 Client Pressure:

Appraisers may face pressure from clients to inflate values or conceal negative information. Resisting such pressure is essential to maintaining ethical conduct❓.

4.4 Compensation:

Appraisers should be compensated on a flat-fee or hourly basis to avoid incentives for biased opinions. Contingent fee arrangements, where payment is dependent on a predetermined value or the success of a transaction, are unethical and violate USPAP.

4.5 Confidentiality:

Appraisers must maintain the confidentiality of client information. This includes protecting sensitive data and refraining from disclosing appraisal results to unauthorized parties.

5. Types of Properties Being Appraised

5.1 Residential Properties:
Include one- to four-unit homes, condominiums, and townhouses.

5.2 Agricultural Properties:
Involve specialized knowledge of soil productivity, water rights, and agricultural practices.

5.3 Commercial Properties:
Include office buildings, retail centers, and industrial warehouses.

5.4 Industrial Properties:
Factories, warehouses, distribution centers, and other properties used for manufacturing or industrial purposes.

5.5 Special Purpose Properties:
Properties with unique characteristics or limited marketability, such as churches, schools, and hospitals.

6. Mathematical Foundations in Appraisal

While this chapter focuses primarily on the profession, regulation, and ethics, it is essential to recognize that appraisal relies on mathematical principles and techniques. Some basic examples include:

6.1 Area Calculation:
The area of a property is fundamental to many valuation methods. Simple formulas are used:

• Area of a rectangle: A = l * w (where l = length, w = width)

• Area of a triangle: A = 0.5 * b * h (where b = base, h = height)

6.2 Percentage Calculations:
Percentage calculations are used extensively in adjustments and market analysis.

• Percentage change: Percentage Change = ((New Value - Old Value) / Old Value) * 100

6.3 Financial Formulas:
More advanced appraisal techniques, such as discounted cash flow analysis, require the use of financial formulas.

• Present Value (PV) of a single future cash flow: PV = FV / (1 + r)^n (where FV = Future Value, r = discount rate, n = number of periods)

7. Practical Applications and Related Experiments

Experiment 1: Analyzing State Appraisal Regulations
* Objective: To understand the specific licensing requirements in your state.
* Procedure:
1. Visit the website of your state’s appraisal regulatory agency.
2. Identify the different appraiser license levels offered in your state.
3. Determine the education, experience, and examination requirements for each license level.
4. Compare the requirements in your state to those in neighboring states.
* Analysis:
Reflect on the potential impact of these requirements on the quality and competence of appraisers in your state.

Experiment 2: Ethical Dilemma Simulation
* Objective: To apply ethical principles to a real-world appraisal scenario.
* Procedure:
1. Find a case study with an ethical dilemma.
2. Discuss different possible courses of action.
3. Identify potential consequences of each course of action.
4. Determine the most ethical course of action based on USPAP and other relevant guidelines.
* Analysis:
Discuss the challenges of maintaining ethical conduct in the face of client pressure or financial incentives.

Conclusion

A strong foundation in the real estate appraisal profession, regulation, and ethics is crucial for success in this field. By understanding the historical context, regulatory framework, and ethical principles that govern appraisal practice, aspiring appraisers can develop the knowledge and skills necessary to provide credible and unbiased opinions of value.