Appraisal Reporting: Standards, Forms, and Liabilities

Appraisal Reporting: Standards, Forms, and Liabilities

1. Introduction: Appraisal as a Process and the Importance of Reporting

An appraisal is not merely a numerical estimate of value, but rather a comprehensive process of developing an opinion of value. The appraisal report serves as the primary means of communicating the findings and conclusions of this process to the intended user. Adhering to rigorous reporting standards is crucial for maintaining transparency, credibility, and preventing potential misinterpretations or misuse of the appraisal. The quality of an appraisal report hinges on the appraiser’s ability to accurately and clearly convey their analysis, supporting data, and reasoning in a manner that is both understandable and compliant with relevant professional standards.

2. Professional Standards for Appraisal Reporting: USPAP and Beyond

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

USPAP is the cornerstone of appraisal reporting standards in the United States. It establishes the ethical and performance guidelines for appraisers and is regularly updated to reflect evolving industry practices and legal requirements. USPAP is structured into Standards, Statements, and Advisory Opinions, with the Standards and associated Standards Rules being the most critical.

• Standard 2: Focuses specifically on appraisal reporting and outlines the requirements for what must be included in an appraisal report. It details the essential elements of a credible and reliable report, ensuring that it is not misleading and provides sufficient information for the intended user to understand the appraiser’s conclusions.
• Standard 3: Deals with appraisal review, setting forth the requirements for appraisers who are tasked with reviewing the work of other appraisers. This includes evaluating the completeness, accuracy, and credibility of the original appraisal report.

2.2. Key Requirements of USPAP Reporting

USPAP mandates that appraisers make specific statements and certifications within their reports to ensure transparency and accountability. These statements require appraisers to certify that they have met certain minimum standards of practice, and they serve as a formal declaration of the appraiser’s compliance with USPAP guidelines. Failure to comply with these requirements can expose the appraiser to disciplinary action and potential legal liability.

2.3. Applicability of USPAP

While not all states mandate universal USPAP compliance for all appraisals, it is generally required in the following scenarios:

1. Appraisals performed for federal lending institutions.
2. Appraisals conducted at the request of the client.
3. Appraisals where compliance is mandated by state law.

Even when not explicitly required, adhering to USPAP guidelines is considered a best practice and enhances the credibility and defensibility of the appraisal report.

3. Appraisal Reporting Options: Oral vs. Written

Appraisal reports can be delivered in two primary formats: oral and written. While the content and analysis remain consistent across both formats, the documentation and presentation differ significantly.

3.1. Oral Reports

An oral report is a verbal communication of the appraiser’s value opinion and supporting analysis. This format is often used for preliminary consultations or when a quick estimate of value is needed.

• USPAP Requirements: Despite being delivered verbally, oral reports are still subject to USPAP’s reporting requirements. Appraisers must document the key elements of the appraisal, including the property description, data sources, assumptions, and reasoning.
• Practical Considerations: Oral reports can be prone to misinterpretation or misquotation. Appraisers must maintain detailed notes of all verbal conversations and ensure that clients understand the limitations of an oral opinion.
• Legal Testimony: Expert witness testimony in court is considered an oral report. However, it usually supplements a written appraisal report that has been presented as evidence.

3.1.1 Record Keeping for Oral Reports: The USPAP Record Keeping Rule necessitates a written summary of an oral report, added to the workfile within a reasonable timeframe after the report is issued. This summary should include enough detail to convey the key elements of the appraisal and support the appraiser’s conclusions. If the appraiser testifies in court, a summary of their testimony must also be included.

3.2. Written Reports

Written reports are the most common and comprehensive format for delivering appraisal conclusions. They provide a detailed record of the appraisal process, analysis, and supporting data. Written reports can range from standardized form reports to detailed narrative reports.

4. Form Reports vs. Narrative Reports

The choice between form and narrative reports depends on the complexity of the assignment, the intended use of the appraisal, and the client’s requirements.

4.1. Form Reports

Form reports are standardized templates designed to streamline the appraisal process and facilitate data comparison. They are commonly used for appraisals of one-to-four-unit residential properties, particularly for mortgage lending purposes.

• Advantages:

  1. Standardization: Provides a consistent format for data presentation, making it easier for clients to review and compare appraisals.
  2. Efficiency: Streamlines the data entry and reporting process.
  3. Electronic Data Interchange (EDI) Compatibility: Facilitates the electronic transfer of data between appraisers, lenders, and other stakeholders.

• Disadvantages:

  1. Limited Flexibility: May not provide enough space or flexibility to adequately address complex issues or unique property characteristics.
  2. Potential for Oversimplification: Can encourage appraisers to oversimplify their analysis to fit the confines of the form.
  3. Risk of Non-Compliance: Some older forms may not comply with current USPAP requirements.

4.1.1 Example Form Report Calculation (Market Conditions Adjustment):
Suppose the annual appreciation rate is 2% in a market, and a comparable sale occurred 6 months before the effective date of the appraisal. The adjustment is calculated as:

Monthly appreciation rate = Annual appreciation rate / 12 months = 2% / 12 = 0.1667% per month

Total Adjustment (%) = Monthly rate * Number of Months = 0.1667% * 6 = 1.0002%

Adjustment Amount = Sale Price of Comparable * Total Adjustment(%)

4.2. Narrative Reports

Narrative reports are more comprehensive and detailed reports that provide a customized presentation of the appraisal process and findings. They are typically used for appraisals of commercial properties, complex residential properties, and other assignments where a more in-depth analysis is required.

• Advantages:

  1. Flexibility: Allows appraisers to tailor the report to the specific needs of the assignment.
  2. Comprehensive Analysis: Provides ample space to explain complex issues, present supporting data, and justify conclusions.
  3. Enhanced Credibility: Demonstrates a higher level of expertise and thoroughness.

• Disadvantages:

  1. Time-Consuming: Requires more time and effort to prepare than form reports.
  2. Potential for Inconsistency: Lack of standardization can make it difficult to compare narrative reports from different appraisers.
  3. Complexity: Can be overwhelming for clients who are not familiar with appraisal terminology.

4.2.1 Basic Structure of Narrative Appraisal Report:

1. Introduction: Includes a table of contents, executive summary, title page, letter of transmittal, and signed certification.
2. Identification of the Appraisal Problem and Scope of Work: Defines the client, intended use and user, subject real estate, property rights appraised, type and definition of value, effective date, and any extraordinary assumptions, hypothetical conditions, jurisdictional exceptions, or limiting conditions.
3. Presentation of Data: Contains legal description, description of subject property (real and personal), listing and sales history, market area description, land and improvement descriptions, and tax information.
4. Analysis of Data and Conclusions: Includes market analysis, highest and best use analysis, land value, application of the valuation approaches (sales comparison, cost, income), reconciliation and final value opinion, exposure time estimate, and appraiser qualifications.
5. Addenda: Includes supporting documents like photographs, legal descriptions, statistical data, leases, and exhibits.

4.2.2 Restricted Appraisal Reports: USPAP allows for a “restricted appraisal report,” intended solely for the client. It contains less information than a standard appraisal report, relying on information present in the appraiser’s work file. Clients must be warned that the report cannot be understood without access to the work file. The intended users of the appraisal should always be clearly defined.

5. Specific Appraisal Forms: URAR and AI Reports

5.1. Uniform Residential Appraisal Report (URAR)

The URAR form is widely used for mortgage lending appraisals of single-family homes. Developed by Fannie Mae and Freddie Mac, it provides a standardized format for reporting property characteristics, market data, and the appraiser’s value conclusion.

5.2. AI Reports

The Appraisal Institute (AI) offers a variety of report forms for different appraisal assignments. The AI-100 Summary Appraisal Report—Residential form is suitable for non-mortgage lending situations such as insurance valuation, probate, litigation, and estate planning. It’s important to avoid using forms meant for the secondary market when the report isn’t for lending purposes, as they contain statements only applicable to lender work.

6. Appraiser Liability

Appraisers face potential liability for errors, omissions, and negligence in their appraisal reports. Common sources of liability include:

• Failure to report property defects: Overlooking or downplaying material defects, such as roof leaks, foundation problems, or environmental hazards.
• Inaccurate data or analysis: Using unreliable data sources, making mathematical errors, or failing to adequately analyze market trends.
• Misleading or fraudulent reporting: Intentionally misrepresenting property characteristics, market conditions, or the appraiser’s qualifications.

To mitigate these risks, appraisers should:

1. Obtain Errors and Omissions (E&O) Insurance: This insurance provides coverage for claims arising from professional negligence.
2. Maintain Thorough Documentation: Keep detailed records of all data sources, analyses, and communications with clients.
3. Adhere to USPAP and Ethical Guidelines: Follow professional standards and ethical principles to ensure the accuracy and integrity of their work.
4. Continuously Enhance Knowledge: Stay up-to-date on appraisal methods, industry trends, and legal requirements.

7. Fair Housing, Lending, and Appraisal Reporting

Appraisers must be aware of and comply with fair housing laws to prevent discrimination in their appraisal reports. This includes avoiding the use of discriminatory language, stereotypes, or unsupported conclusions related to race, color, religion, national origin, gender, familial status, or disability.

• USPAP Ethics Rule: Prohibits appraisers from using or relying on unsupported conclusions regarding protected characteristics or making unsupported claims that homogeneity of such characteristics is necessary to maximize value.
• Legal Restrictions: Some jurisdictions may prohibit the use of supported conclusions related to protected characteristics if they violate applicable laws.

8. The Importance of Certification

Appraisal certifications are essential for ensuring the appraiser’s accountability. By signing a certification, the appraiser claims that they performed the required steps in the appraisal. Reviewing the certification carefully before signing is critical.

9. The “Ghost Appraiser” Problem

It is unethical for a trainee to perform appraisals while the boss signs the report as if they did the work themselves. Certification statements are intended to ensure the appraiser who signs the report inspected the property, analyzed comparable sales, and collected the relevant data. Appraisers should inspect the property themselves, collect and analyze the information, and report their own conclusions.