The Appraisal Profession and Ethics

Chapter: The Appraisal Profession and Ethics

Introduction

The appraisal profession plays a crucial role in real estate transactions, providing unbiased opinions of value. This chapter explores the structure and regulation of the profession, emphasizing the ethical responsibilities of appraisers. A lack of regulation prior to 1990 created inconsistencies in standards and education, leading to concerns about the credibility of appraisals. The establishment of organizations like the Appraisal Institute and the passage of FIRREA have significantly professionalized the field.

1. Evolution and Structure of the Appraisal Profession

1.1 Pre-FIRREA Era

Before the Financial Institutions Reform, Recovery, and Enforcement Act (FIRREA) of 1989, the appraisal industry lacked consistent regulation. Many individuals could claim to be appraisers without possessing adequate qualifications or adhering to standardized practices. Professional designations from organizations like the Society of Real Estate Appraisers and the American Institute of Real Estate Appraisers (AIREA) were the primary means of identifying qualified appraisers, but public awareness of these designations was limited.

1.2 Post-FIRREA Regulation

The Savings and Loan Crisis of the late 1980s prompted the enactment of FIRREA, which mandated state licensing and certification for appraisers involved in federally related transactions (FRTs). 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.
Each state established an agency to regulate appraiser licensing.
FIRREA established The Appraisal Foundation (TAF).

1.3 The Appraisal Foundation (TAF)

TAF is a non-profit organization responsible for setting appraisal standards and qualifications. It comprises two key boards:

1.3.1 The Appraiser Qualifications Board (AQB)

The AQB establishes the minimum education and experience requirements for appraiser licensing and certification. It also develops the exam content outline used by states to guide curriculum development.
The AQB publishes minimum criteria, which state appraiser regulatory agencies can exceed.

1.3.2 The Appraisal Standards Board (ASB)

The ASB develops, interprets, and amends the Uniform Standards of Professional Appraisal Practice (USPAP). USPAP outlines the ethical and performance standards for appraisers. While USPAP itself lacks legal authority, it becomes enforceable through adoption by state, local, and federal agencies.

1.4 The Appraisal Subcommittee (ASC)

The Appraisal Subcommittee of the Federal Financial Institutions Examination Council (FFIEC) oversees state appraiser regulatory programs to ensure compliance with federal requirements. The ASC conducts periodic audits of state programs and can decertify programs that fail to meet federal standards, rendering them unacceptable to federally regulated lenders.

2. Types of Appraisal Licenses

Most states offer several levels of appraisal licenses, each with specific requirements and scope of practice:

2.1 Trainee, Registered, or Associate Appraiser

This is the entry-level classification, often involving an apprenticeship under a supervising appraiser. Trainees may have limitations on the types of properties they can appraise, depending on state regulations and the supervisor’s license.

2.2 Licensed Residential Appraiser

Licensed Residential Appraisers are typically authorized to appraise one- to four-unit residential properties with loan amounts below a specified threshold (e.g., $1 million). They can also perform appraisals for non-federally related transactions, such as divorce settlements and estate settlements.

2.3 Certified Residential Appraiser

Certified Residential Appraisers can appraise one- to four-unit residential properties without loan amount restrictions. They are also qualified to perform appraisals for non-federally related transactions.

2.4 Certified General Appraiser

Certified General Appraisers are authorized to appraise all types of properties, including residential, commercial, industrial, and agricultural properties.

3. Ethics in Appraisal Practice

3.1 Objectivity and Impartiality

Appraisers must maintain objectivity and impartiality in their work. Unlike advocates, such as attorneys or real estate brokers, appraisers have an obligation to all intended users of their work, not just the client.
Objectivity requires that the appraiser approach the assignment without bias or preconceived notions.

3.2 Avoiding Client Pressure

Appraisers must resist client pressure to produce predetermined or biased opinions of value. Accepting assignments contingent❓ on specific outcomes is unethical.

3.3 Conflicts of Interest

Appraisers must avoid conflicts of interest that could compromise their objectivity.
Example: Accepting appraisal assignments from a spouse who is a loan originator paid on commission is unethical because the appraiser’s family income would be directly affected by the appraisal outcome.

3.4 Competency

Appraisers must only accept assignments for which they possess the necessary knowledge, skills, and experience. This includes understanding the specific property type, market conditions, and valuation techniques relevant to the assignment. Meeting state licensing or certification requirements does not automatically guarantee competency for all types of appraisal work.

3.5 Confidentiality

Appraisers have a duty to protect the confidentiality of client information. Data, analyses, and conclusions shared by the client should not be disclosed without proper authorization.

3.6 Compensation

Appraisers should be compensated in a manner that does not create incentives for unethical behavior. Fees should be based on the time and effort required to complete the appraisal assignment, rather than being contingent on the outcome of the appraisal or the closing of a transaction.

Example of unethical compensation: An appraiser accepts fee arrangements in which they are paid if a mortgage loan closes.

4. Uniform Standards of Professional Appraisal Practice (USPAP)

USPAP provides a framework for ethical and competent appraisal practice. Key components of USPAP include:

• Ethics Rule: Emphasizes integrity, impartiality, objectivity, and compliance with USPAP.
• Competency Rule: Requires appraisers to have the knowledge and experience necessary to perform assignments competently.
• Scope of Work Rule: Outlines the appraiser’s responsibilities for defining the scope of work, including the extent of research, analysis, and reporting.
• Record Keeping Rule: Mandates that appraisers maintain workfiles for each appraisal assignment.
• Reporting Standards: Provide guidelines for the content and format of appraisal reports, ensuring that they are clear, accurate, and not misleading.

5. Examples and Practical Applications

Example 1: Client Pressure

A lender asks an appraiser to “hit” a specific value on a property to ensure that a loan is approved. The appraiser knows that the market data does not support the requested value. An ethical appraiser would decline the assignment or complete the appraisal based on their independent analysis and supportable data, regardless of the lender’s wishes.

Example 2: Conflict of Interest

An appraiser is asked to appraise a property owned by a close family member. Even if the appraiser believes they can be objective, the appearance of a conflict of interest could undermine the credibility of the appraisal. The appraiser should disclose the relationship to the client and consider declining the assignment.

Example 3: Competency

A residential appraiser is asked to appraise a complex industrial property. The appraiser lacks the necessary expertise in industrial valuation. An ethical appraiser would decline the assignment or associate with an appraiser who possesses the required competency.

6. Mathematical Considerations and Formulas

While ethical considerations are not directly quantifiable, they influence the application of valuation formulas and techniques. For example, the selection of comparable sales should be unbiased and based on objective market data, not on a desire to achieve a predetermined value.

Example: When performing a sales comparison analysis, the appraiser must carefully analyze and adjust for differences between the subject property and comparable sales. These adjustments should be based on market data and supported by credible evidence. The formula for adjusting a comparable sale can be expressed as:

Adjusted Sale Price = Sale Price ± Adjustments

Where the adjustments reflect the differences in features, location, condition, and other factors between the subject and comparable properties. The ethical appraiser will ensure that these adjustments are not biased to skew the indicated value.

7. Conclusion

Ethical conduct is paramount in the appraisal profession. Maintaining objectivity, avoiding conflicts of interest, and adhering to USPAP are essential for ensuring the integrity and credibility of appraisal services. By upholding these ethical standards, appraisers contribute to the stability and transparency of the real estate market.