Appraisal Reporting: Standards, Forms, and Liability

Appraisal Reporting: Standards, Forms, and Liability

Introduction

This chapter delves into the crucial aspects of appraisal reporting, encompassing the standards that govern appraisal practice, the common reporting formats used, and the potential liabilities faced by appraisers. Understanding these elements is paramount for producing credible and defensible appraisal reports. An appraisal report serves as the conduit for communicating the appraiser’s opinions and conclusions to the client and other intended users. Due to the reliance placed upon appraisal reports in various decision-making processes, adherence to professional standards is of utmost importance.

Professional Standards for Appraisal Reporting

• The Uniform Standards of Professional Appraisal Practice (USPAP): USPAP represents the cornerstone of appraisal practice in the United States. It establishes ethical and performance standards for appraisers across various disciplines, including real property, personal property, and business valuation.

  • USPAP is developed, interpreted, and amended by The Appraisal Foundation (TAF).
  • Compliance with USPAP is often mandated by law, regulation, or contractual agreement, especially in federally related transactions.

  • USPAP consists of Standards, Statements on Appraisal Standards (SMT), Advisory Opinions (AO), and Frequently Asked Questions (FAQ).

  • Standard 2: Real Property Appraisal Reporting: This standard details the requirements for reporting the results of a real property appraisal. It dictates the content, format, and level of detail required in an appraisal report. Standard 2 encompasses two report options: Appraisal Report and Restricted Appraisal Report.

    • Appraisal Report: Requires a summary of the information considered, the appraisal methods employed, and the reasoning that supports the analyses, opinions, and conclusions.
    • Restricted Appraisal Report: Intended for limited use by the client only and includes a prominent use restriction. Provides a limited discussion of the appraisal; relies heavily on workfile documentation not included in the report.

• Appraisal Institute Standards: The Appraisal Institute, a professional organization for appraisers, has its own set of standards that complement USPAP. These standards include specific requirements for designated members and emphasize ethical conduct and professional development.

• Essential Elements of an Appraisal Report (based on USPAP Standard 2):

  1. Identification of the Client and Intended Users: Clearly state who the appraisal is for and who will rely on it.
  2. Intended Use of the Appraisal: Define the purpose for which the appraisal is being performed (e.g., mortgage lending, estate planning).
  3. Type and Definition of Value: Specify the type of value being estimated (e.g., market value, liquidation value) and the definition of that value. The definition of market value, for example, often includes elements such as a willing buyer and seller, an arms-length transaction, and exposure time.
  4. Effective Date of the Appraisal: The specific date as of which the value opinion is applicable.
  5. Subject Property Characteristics: A detailed description of the property being appraised, including its legal description, physical attributes, and any relevant encumbrances.
  6. Scope of Work: Outline the extent of the appraisal process, including the data researched, the analyses performed, and any limitations encountered.
  7. Assumptions and Limiting Conditions: State any extraordinary assumptions or hypothetical conditions that affect the appraisal and the general assumptions and limiting conditions under which the appraisal was performed.
  8. Valuation Approaches Considered: Identify the cost approach, sales comparison approach, and income capitalization approach, and explain which approaches were used and why.
  9. Analysis and Conclusions: Present the data analysis and reasoning that led to the value opinion.
  10. Reconciliation of Value Indications: Explain how the value indications from the different approaches were reconciled into a final value opinion.
  11. Final Opinion of Value: State the appraiser’s conclusion regarding the value of the subject property.
  12. Certification: Include a signed certification that attests to the appraiser’s compliance with USPAP and relevant professional standards.

Appraisal Reporting Options: Forms vs. Narrative

• Form Reports: Standardized documents used for specific appraisal assignments, particularly in residential mortgage lending.

  • Advantages: Efficiency, consistency, ease of data comparison, compatibility with electronic data interchange (EDI) systems.
  • Disadvantages: Limited space for detailed explanations, potential for overlooking important details, may not comply with current USPAP requirements.
  • Examples: Uniform Residential Appraisal Report (URAR), AI Reports AI-100 Summary Appraisal Report.
  • The URAR form is used for appraisals of one-unit attached and detached homes that include both exterior and interior inspections.

• Narrative Reports: Comprehensive reports that provide detailed information and analysis.

  • Advantages: Flexibility, ability to address complex appraisal problems, opportunity for thorough explanations.
  • Disadvantages: Time-consuming, requires more writing and analytical skills.

  • Structure of a Narrative 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: States the client, intended use and user, subject real estate, property rights appraised, type and definition of value, and the effective date of the value opinion. Also includes any extraordinary assumptions, hypothetical conditions, jurisdictional exceptions, general assumptions, or limiting conditions.
    3. Presentation of Data: Includes the legal description of the subject, any personal property, the subject’s listing and sale history, a description of the subject’s location and market area, descriptions of the land and improvements, and tax information.
    4. Analysis of Data and Conclusions: Describes the market analysis, the highest and best use analysis, the land value, the application of one or more of the approaches to value, the reconciliation and final value opinion, the exposure time estimate, and the appraiser’s qualifications.
    5. Addenda: Photographs, a detailed legal description of the subject, detailed statistical data, leases or lease summaries, or exhibits.

• Oral Reports: Opinions of value communicated verbally to clients, e.g. expert witness testimony.

  • The professional standards for developing an opinion of value that will be delivered through an oral report are no different from the standards that apply when delivering the conclusions through a written report.
  • USPAP states that the appraiser must report certain minimum data in an oral appraisal report.
  • An appraiser must have a written summary of an oral report in the workfile.

Fair Housing, Lending, and Appraisal Reporting

Federal fair housing laws prohibit discrimination based on race, color, religion, sex, national origin, familial status, or disability. Appraisers must be mindful of these laws when developing and reporting appraisal opinions.

• An appraiser must not use or rely on unsupported conclusions relating to protected characteristics.
• In some cases, you cannot even use supported conclusions in assignments relating to those characteristics because they are precluded by applicable law.
• Avoid reporting personal information, attitudes, and preferences of buyers in an appraisal report.
• Do not lead the reader of an appraisal report to a conclusion that one type or class of buyer should or should not buy a particular residential property.

Appraiser Liability

Appraisers can be held liable for errors, omissions, or negligence in their appraisal reports. This liability can arise from various sources, including:

• Breach of Contract: Failure to fulfill the terms of the appraisal assignment agreement.
• Negligence: Failure to exercise the degree of care and skill that a reasonably prudent appraiser would exercise under similar circumstances.
• Fraud: Intentional misrepresentation or concealment of material facts.

• Violation of USPAP: Failure to comply with the ethical and performance standards of USPAP.

• Sources of Liability Claims:

  • Overvaluation or undervaluation of the property.
  • Failure to disclose material facts or conditions.
  • Errors in data analysis.
  • Use of inappropriate valuation methods.
  • Lack of independence or objectivity.

• Mitigating Liability:

  • Errors and Omissions (E&O) Insurance: Protects appraisers from financial losses arising from errors or omissions in their work.
  • Continuing Education: Staying up-to-date on appraisal standards, techniques, and legal requirements.
  • Thorough Data Collection and Analysis: Conducting a comprehensive investigation of the subject property and relevant market data.
  • Clear and Accurate Reporting: Providing clear, concise, and well-supported opinions and conclusions in the appraisal report.
  • Compliance with USPAP: Adhering to the ethical and performance standards of USPAP.

Example Application: Sales Comparison Approach Adjustments

In the sales comparison approach, adjustments are made to the sale prices of comparable properties to account for differences between the comparables and the subject property. These adjustments are based on market data and the appraiser’s judgment.

• Condition Adjustment: Consider comparable properties of different ages but in average condition for their age and market, condition adjustments are not needed. Condition adjustments are not needed if the properties are different ages but are in average condition for their age and market.

• Size and Room Count Adjustments: Some appraisers seldom make adjustments for size and room count, while others will make a smaller adjustment for the amount of building area and then make room count adjustments as well. Most appraisers will make adjustments for a greater or smaller number of bathrooms in a dwelling.

• Site Size Adjustment: Adjustments were not made for those differences because it was believed that the site size did not have a significant effect on the price of those properties as compared to the subject.

• Time Adjustment: To account for changes in market conditions, an adjustment may be necessary. This adjustment is based on the observed rate of appreciation or depreciation in the market.

  • Formula:

    Adjustment = (Monthly Rate of Change) * (Number of Months Elapsed)

    Where:

    • Adjustment = The dollar amount of the adjustment.
    • Monthly Rate of Change = The monthly percentage rate of appreciation or depreciation.
    • Number of Months Elapsed = The number of months between the sale date of the comparable property and the effective date of the appraisal.
    • If the annual appreciation rate is A, then the monthly rate can be calculated as: Monthly Rate of Change = A/12.

  • Example: If the annual appreciation rate in a market is 2% (A = 0.02), then the monthly rate of change is approximately 0.17% (0.0017). If a comparable property sold 6 months prior to the effective date of the appraisal, the time adjustment would be: Adjustment = (0.0017) * (6) = 0.0102 or 1.02% of the comparable’s sale price.

*Overall, Comparable 1 appears to be most similar to the subject property because it has so few adjustments, is the most recent, and is located in the same subdivision. Its address even suggests that it is across the street from the subject property. The only significant differences are the size of the house and the lack of central air-conditioning.

The “Ghost Appraiser” Problem

• In some markets, trainees may perform appraisals and the boss signs the appraisal report as if the boss had done the work.
• The certification statements included in form reports were designed to make appraisers swear that they are the parties who inspected the property and collected and analyzed comparable sales and other relevant data.
• Appraisers who engage in these practices are misleading their clients, which is unethical.

Conclusion

Appraisal reporting is a critical function that requires adherence to professional standards, careful consideration of reporting formats, and awareness of potential liabilities. By understanding and applying the principles outlined in this chapter, appraisers can produce credible, defensible, and ethical appraisal reports that meet the needs of their clients and contribute to sound decision-making.