Appraisal Reporting: Standards, Forms, and Liability

Appraisal Reporting: Standards, Forms, and Liability

This chapter delves into the crucial aspects of appraisal reporting, focusing on adherence to professional standards, the utilization of various report formats, and the potential liabilities appraisers face. A thorough understanding of these elements is paramount for ethical and competent appraisal practice.

1. Professional Standards for Appraisal Reporting

Appraisal reporting is governed by professional standards that ensure transparency, accuracy, and reliability. The most widely recognized standard is the Uniform Standards of Professional Appraisal Practice (USPAP).

• 1.1 USPAP Structure:
  USPAP is structured into Standards, Statements, and Advisory Opinions. The Standards and related Standards Rules are the most critical, outlining the mandatory requirements for appraisal development and reporting.

  • Standard 2: This standard provides specific guidance on the essential elements to be included in appraisal reports, ensuring that the report is clear, accurate, and not misleading.
  • Standard 3: This standard outlines requirements for appraisers reviewing appraisal reports, enabling quality control and dispute resolution.

• 1.2 Essential Elements of Appraisal Reporting:
  USPAP mandates specific disclosures in appraisal reports to prevent misinterpretation and to ensure the appraiser has met minimum practice standards. Key aspects include:

  • Clear identification of the client and intended users.
  • Statement of the purpose and intended use of the appraisal.
  • Definition of the value being estimated (e.g., market value, fair value).
  • Effective date of the appraisal.
  • Description of the property being appraised.
  • Disclosure of all assumptions, limiting conditions, and hypothetical conditions.
  • Summary of the data analyzed and the appraisal methods used.
  • Rationale for the valuation opinion.
  • Certification by the appraiser attesting to compliance with USPAP.

• 1.3 USPAP Compliance:
  While not all jurisdictions mandate USPAP compliance for all appraisals, adherence is typically required for federally related transactions, client requests, or state laws. Even when not legally mandated, USPAP serves as a robust framework for ethical and sound appraisal practice.

2. Appraisal Reporting Options

Appraisers have several options for delivering their valuation opinions, each with specific applications and characteristics.

• 2.1 Oral Reports:
  Oral reports involve communicating the appraisal findings directly to the client, often when a formal written report is not required.

  • USPAP still requires the appraiser to maintain adequate documentation of the data and reasoning supporting the oral opinion.
  • Detailed notes of verbal conversations are critical to prevent misquotations and potential liability.

• 2.2 Written Reports:
  Written reports are the most common method of delivering appraisal conclusions, providing a documented record of the valuation process. They vary in format and level of detail depending on the complexity of the assignment.

  • 2.2.1 Form Reports:
    Form reports utilize standardized templates for data presentation, promoting consistency and efficiency.
    • Commonly used for one- to four-unit residential properties, leveraging pre-defined sections for key data points.
    • Compatible with computer programs and electronic data interchange❓❓ (EDI) systems.
    • Limitation: May lack sufficient space for detailed explanations or complex analysis, necessitating supplemental addenda.
  • 2.2.2 narrative reports❓❓:
    Narrative reports offer greater flexibility in format and content, allowing for customized presentations tailored to the specific property and client needs.
    • Typical Structure:
      1. Introduction: Table of contents, executive summary, title page, letter of transmittal, and appraiser’s certification.
      2. Identification of the Appraisal Problem and Scope of Work: Client, intended use/user, subject property, property rights appraised, type/definition of value, effective date, extraordinary assumptions, hypothetical conditions, and jurisdictional exceptions.
      3. Presentation of Data: Legal description, personal property, listing/sale history, location/market area, land/improvements descriptions, and tax information.
      4. Analysis of Data and Conclusions: Market analysis, highest and best use analysis, land value, application of valuation approaches (e.g., sales comparison, cost, income capitalization), reconciliation, final value opinion, exposure time estimate, and appraiser’s qualifications.
      5. Addenda: Photographs, detailed legal description, statistical data, leases, and exhibits.
  • 2.2.3 Restricted Appraisal Report
    This report is intended for the client only and must contain a notice to any reader that the conclusions and opinions expressed in the report may not be understood properly without information in the appraiser’s workfile that was not included in the restricted appraisal report.

• 2.3 Sales Comparison Approach Adjustments:
  In this approach adjustments are made to the sale prices of comparable properties to account for differences between them and the subject property. An understanding of regression analysis is helpful. The change in value, dV, with respect to a change in some property characteric dX is
  dV = beta * dX
  where beta is the regression coefficient relating X to the dependent variable of the sale price.

3. Common Appraisal Forms

Several standardized forms are widely used in appraisal practice, particularly for residential properties.

• 3.1 Uniform Residential Appraisal Report (URAR):
  The URAR form is used for appraisals of one-unit attached and detached homes involving both exterior and interior inspections. Developed by Fannie Mae and Freddie Mac, it is widely adopted by lenders for mortgage lending purposes.

• 3.2 AI Reports AI-100 Summary Appraisal Report—Residential:
  This form is suitable for non-mortgage lending situations, such as valuations for insurance, probate, litigation, and estate/financial planning. Its certifications are tailored to non-lending contexts.

4. Appraiser Liability

Appraisers can face legal liability for errors, omissions, or negligence in their appraisal work.

• 4.1 Sources of Liability:

  • Failure to accurately report property deficiencies (e.g., leaky roof, faulty HVAC system).
  • Inadequate reporting of flood hazard areas or zoning issues.
  • Errors in value opinions leading to financial losses for clients.

• 4.2 Minimizing Liability:

  • Errors and Omissions (E&O) Insurance: Provides coverage against financial losses due to mistakes or negligence.
  • Continuing Education: Staying updated on appraisal principles, methodologies, and legal requirements.
  • Thorough Property Inspection: Conducting comprehensive inspections to identify and document any potential issues.
  • Careful Documentation: Maintaining detailed records of the appraisal process, data analysis, and conclusions.
  • Competency: Accepting assignments only within your areas of expertise.

• 4.3 The “Ghost Appraiser” Issue:
  Having a trainee perform appraisals and then having a boss sign the appraisal report as if the boss had done the work. Appraisers who engage in these practices are misleading their clients and acting unethically.

• 4.4 Certification Statements:
  Carefully review the certification statement before signing the appraisal report. Appraisers must perform all the required steps in the appraisal.