Appraisal Reporting: Standards, Forms, and Liability

appraisal report❓ing: Standards, Forms, and Liability

1. Introduction to Appraisal Reporting

An appraisal is the process of developing an opinion of value, while an appraisal report is the communication of this opinion. It is crucial that appraisers adhere to established reporting standards for transparency and to prevent misleading interpretations.

• Importance of Standards: Appraisal reports are relied upon by various parties (lenders, buyers, courts, etc.), who often lack the means to independently verify the appraiser’s conclusions. Thus, rigorous standards are essential.

• Professional Standards Organizations: Organizations such as The Appraisal Foundation, through its Uniform Standards of Professional Appraisal Practice (USPAP), define and update these standards regularly. Staying current with these revisions is a continuous professional obligation.

• USPAP Structure: USPAP is composed of Standards, Statements, and Advisory Opinions. Standards 2 and 3 directly address appraisal reporting requirements, providing guidance on what must❓ be included in appraisal reports and outlining requirements for appraisers who review appraisal reports, respectively.

2. Professional Standards for Appraisal Reporting

These standards aim to ensure transparency, minimize ambiguity, and maintain the integrity of the appraisal profession. Adherence to USPAP is generally required when the appraisal is for a federal lending institution, requested by the client, or mandated by state law. Even when not mandatory, USPAP serves as a robust best-practice guide.

• Minimum Requirements: Appraisal reports must contain specific statements and certifications that confirm the appraiser has met defined minimum standards. This includes confirming a personal inspection of the property, verification of data, and independence in the appraisal process.

• Certification: Appraisers must sign a certification within the report attesting to their compliance with specified requirements. This certification acts as a legal affirmation of the appraiser’s adherence to professional standards. The specific language of the certification is defined in Standards Rule 2-3 of USPAP and by other professional bodies, such as the Appraisal Institute.

3. Appraisal Reporting Options

Appraisal reports can take various forms, including:

• Oral Reports: Typically delivered directly to clients. USPAP dictates minimum data requirements, but the client often requests a concise summary of the appraiser’s opinion. Oral reports can also take the form of expert witness testimony in court.

  • Documentation: Critical to maintain detailed notes of oral communications to prevent misinterpretations or misquotes. USPAP also mandates a written summary of the oral report be included in the workfile.
  • USPAP Requirement: The Record Keeping Rule of USPAP requires the workfile to exist prior to the issuance of the report.

• Written Reports: These can range from standardized form reports to detailed narrative reports.

  • Form Reports: Commonly used for residential (1-4 unit) properties. Offers consistency, facilitates electronic data interchange (EDI), and ensures a structured approach. Standard forms include the Uniform Residential Appraisal Report (URAR), developed by Fannie Mae and Freddie Mac. The AI Reports AI-100 Summary Appraisal Report—Residential form is an alternative for non-mortgage lending appraisals.

  • Narrative Reports: Primarily used for non-residential properties and complex appraisals. Allows for greater flexibility but requires more work. Can range from 10 to over 200 pages.

4. Written Appraisal Reports: Form vs. Narrative

4.1 Form Reports:

• Advantages: Streamlined data presentation, compatibility with computer programs and EDI systems, reduced risk of omitting important steps.
• Disadvantages: Can lead to superficial analysis if appraisers rely solely on the form’s structure. Appraisers cannot use the lack of space on the form as an excuse for failing to adequately explain information.
• USPAP Compliance: Appraisers must ensure form reports comply with the latest edition of USPAP, as some forms might not be up-to-date.

4.2 Narrative Reports:

• Flexibility: Content and format can be customized based on the property type, client needs, and specific issues.

• Structure: Narrative reports often follow a standard structure:

  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: Identifies the client, intended use and users, subject real estate, property rights appraised, type and definition of value, effective date of the value opinion, and any extraordinary assumptions or hypothetical conditions.
  3. Presentation of Data: Legal description of the subject, personal property included, listing and sale history, description of the location and market area, descriptions of the land and improvements, and tax information.
  4. Analysis of Data and Conclusions: Market analysis, highest and best use analysis, land value, application of valuation approaches (sales comparison, cost, income capitalization), reconciliation and final value opinion, exposure time estimate, and appraiser qualifications.
  5. Addenda: Supporting documentation, such as photographs, legal descriptions, statistical data, leases, and exhibits.

• USPAP Reporting Options (2014-2015 ed.): USPAP distinguishes between a standard “appraisal report” and a “restricted appraisal report.” Restricted reports are intended for the client’s use only and require a notice indicating that the report may not be properly understood without access to information in the appraiser’s workfile.

5. The Sales Comparison Approach and Adjustments

The sales comparison approach relies on analyzing comparable sales to derive a value indication for the subject property.

• Condition Adjustments: Condition ratings are relative to competing properties within the same market segment and age range. Condition adjustments are not needed if properties of different ages are in average condition for their respective age within that market.

• Size and Room Count Adjustments: Making separate adjustments for size (e.g., gross living area) and room count can lead to “double-counting.” Different approaches exist: some appraisers adjust only for GLA, some adjust both, and some avoid adjustments altogether.

• Bathroom Adjustments: Bathrooms are expensive to build, justifying adjustments for differences in the number of bathrooms. Note that the area of the bathroom is already captured in the Gross Living Area (GLA).

• Site Size Adjustments: Adjustments for site size are made when site size significantly affects property value in the relevant market. This determination requires market knowledge and analysis.

• Market Conditions Adjustments:

  • Formula: Adjustment = (Monthly Appreciation Rate) * (Number of Months)
  • Where: Monthly Appreciation Rate = Annual Appreciation Rate / 12
  • Example: If the annual appreciation rate is 2%, the monthly rate is 0.02 / 12 = 0.0017 (0.17%). If a comparable sold 6 months prior to the effective date, the market conditions adjustment would be 0.0017 * 6 = 0.0102 (1.02%).
  • The adjustment is then applied to the comparable property’s sale price.

6. Appraiser Liability

Appraisers face increasing liability for errors or omissions in their reports.

• Common Areas of Liability: Failure to report property deficiencies (e.g., roof leaks, faulty systems), inaccurate reporting of flood zones or zoning issues.
• Mitigation: Errors and omissions (E&O) insurance can protect against financial losses resulting from mistakes. Continuing education, especially on building construction and physical real estate principles, is crucial.
• Perception vs. Reality: The public often views appraisers as building inspectors, increasing expectations for identifying and reporting physical defects.
• Value Opinion Liability: Appraisers can be sued if clients incur losses due to reliance on the appraiser’s value opinion. The higher the financial losses, the greater the risk of litigation.
• Certification and Due Diligence: Appraisers must carefully review the certification statement before signing the report. The certification affirms that the appraiser has performed all the required steps and met the professional standards.
• “Ghost Appraisers”: Unethical practice where trainees perform appraisals, and the supervisor signs the report as if they had completed the work. The certification statements are designed to prevent this practice, making the signing appraiser liable for the report’s conclusions.

7. Fair Housing, Lending, and Appraisal Reporting

Appraisers must be acutely aware of and comply with fair housing laws to prevent discrimination.

• Prohibited Information: Reporting information regarding schools, personal information, attitudes, or preferences of buyers in an appraisal report can violate fair housing laws.
• Unsupported Conclusions: USPAP’s Ethics Rule prohibits using or relying on unsupported conclusions related to protected characteristics (race, color, religion, national origin, gender, marital status, familial status, age, public assistance income, handicap).
• Applicable Law: Even supported conclusions may be impermissible if precluded by applicable law.

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