From Apprenticeship to Regulation: Reshaping Appraisal

From Apprenticeship to Regulation: Reshaping Appraisal

Introduction

The appraisal profession has undergone a significant transformation, evolving from a system heavily reliant on apprenticeship and practical experience to one governed by strict regulations, standardized practices, and advanced technology. This chapter will explore this evolution, focusing on the forces that reshaped appraisal, the scientific principles underlying appraisal practices, and the implications of these changes for the profession.

I. The Era of Apprenticeship: Learning by Doing

A. Characteristics of the Apprenticeship Model

Before widespread regulation, appraisal was primarily learned through practical experience. Aspiring appraisers would apprentice under seasoned professionals, gradually gaining knowledge and skills through observation and hands-on work.

1. Limited Formal Education: Formal education requirements were minimal. As the provided text indicates, education often consisted of one or two courses from appraisal organizations or local community colleges. The emphasis was placed on practical training rather than academic qualifications.

2. Mentorship and Practical Experience: The core of the apprenticeship model was mentorship. Apprentices would assist experienced appraisers in all aspects of the appraisal process, from property inspection to report writing. This allowed for the gradual acquisition of skills and knowledge in a real-world setting.

3. Informal Standards: While professional organizations existed, appraisal standards were often informal and varied depending on the individual appraiser and their geographic location. This lack of standardization could lead to inconsistencies in appraisal practices and valuations.

B. Advantages and Disadvantages of the Apprenticeship Model

1. Advantages:
   a. Practical Skill Development: Apprentices gained invaluable practical skills through direct experience.
   b. Industry Networking: Apprenticeships provided opportunities to build relationships within the appraisal community.
   c. Cost-Effective Training: The apprenticeship model was relatively inexpensive for aspiring appraisers compared to formal education programs.

2. Disadvantages:
   a. Inconsistent Standards: The lack of standardized training and practices led to inconsistencies in appraisals.
   b. Limited Theoretical Foundation: Apprenticeships often lacked a strong foundation in appraisal theory and economic principles.
   c. Subjectivity and Bias: Appraisal practices could be influenced by the subjective opinions and biases of the mentor.

II. The Seeds of Change: The Garn-St. Germaine Act and the Savings and Loan Crisis

A. The Garn-St. Germaine Act (1982)

The Garn-St. Germaine Depository Institutions Act of 1982 was a significant turning point for the appraisal industry. This act deregulated the Savings and Loan (S&L) industry, allowing them to engage in a wider range of financial activities beyond traditional residential lending.

1. Deregulation and Increased Risk: The act allowed S&Ls to invest in riskier assets, such as commercial real estate, junk bonds, and unsecured personal loans. This increased the potential for financial instability within the industry.

2. The Austrian Economic School: The text mentions President Reagan’s support for the Austrian Economic School of Economics, which advocates for deregulation and limited government intervention in the economy. This philosophy influenced the passage of the Garn-St. Germaine Act.

B. The Savings and Loan Crisis (Late 1980s)

The deregulation of the S&L industry, coupled with poor management practices and fraudulent activities, led to a massive collapse of S&Ls in the late 1980s.

1. Financial Losses and Taxpayer Bailout: The S&L crisis resulted in substantial financial losses for depositors and taxpayers. The government was forced to implement a large-scale bailout to stabilize the financial system, costing taxpayers approximately $500 billion.

2. Increased Scrutiny of Appraisal Practices: The S&L crisis exposed deficiencies in appraisal practices, including inflated valuations and a lack of independence. This led to calls for greater regulation and oversight of the appraisal profession.

III. The Rise of Regulation: FIRREA and USPAP

A. The Financial Institutions Reform, Recovery, and Enforcement Act (FIRREA) of 1989

The Financial Institutions Reform, Recovery, and Enforcement Act (FIRREA) of 1989 was enacted in response to the S&L crisis. This act established a comprehensive regulatory framework for the appraisal profession, including licensing requirements and professional standards.

1. Appraisal Licensing and Certification: FIRREA mandated that appraisers be licensed or certified to perform appraisals for federally related transactions. This ensured that appraisers met minimum qualifications and adhered to professional standards.

2. The Appraisal Foundation: FIRREA chartered the Appraisal Foundation, a non-profit organization responsible for developing and promoting appraisal standards and qualifications.

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

The Appraisal Foundation developed the Uniform Standards of Professional Appraisal Practice (USPAP), which are the ethical and performance standards for appraisers in the United States.

1. Ethical Obligations: USPAP outlines the ethical obligations of appraisers, including impartiality, objectivity, and confidentiality.

2. Performance Standards: USPAP establishes performance standards for appraisal assignments, covering topics such as scope of work, data collection, analysis, and reporting.

3. Competency Rule: USPAP requires appraisers to have the knowledge and experience necessary to perform an appraisal assignment competently. If an appraiser lacks the necessary expertise, they must either decline the assignment or take steps to become competent, such as consulting with an expert.

IV. The Evolution of Appraisal Techniques and Technologies

A. Impact of Technology on Appraisal Practices

1. Early Technology (Late 20th Century):
   a. Cell Phones, Answering Machines, and Fax Machines: Improved communication and efficiency in the appraisal process.
   b. Personal Computers and Software: Enabled appraisers to create and manage appraisal reports electronically. Early systems ran on computers with limited memory (e.g., 90 kilobytes) and used daisy-wheel printers.
   c. Digital Cameras: Replaced traditional film cameras, providing appraisers with a more efficient way to capture property images.

2. Automated Valuation Models (AVMs)

AVMs are computer-based systems that use statistical models and algorithms to estimate property values.

a. Statistical Regression Analysis: AVMs often employ statistical regression analysis to identify relationships between property characteristics and market values.
The general form of a multiple regression equation is:
Y = β₀ + β₁X₁ + β₂X₂ + … + βₙXₙ + ε
Where:
* Y is the dependent variable (e.g., estimated property value).
* X₁, X₂, …, Xₙ are the independent variables (e.g., square footage, number of bedrooms, lot size).
* β₀ is the intercept.
* β₁, β₂, …, βₙ are the regression coefficients.
* ε is the error term.

b. Data Sources: AVMs rely on various data sources, including public records, sales data, and property characteristics databases.

c. Limitations: AVMs have limitations, including a lack of local market knowledge and an inability to account for unique property characteristics. The provided text stresses that AVMs are tools, not actual appraisals.

3. Mobile Technology and Digital Data Collection:
   a. Smartphones and Tablets: Enable appraisers to access data, capture photos, and complete inspections in the field.
   b. Cloud-Based Appraisal Software: Facilitates collaboration and data sharing among appraisers and other stakeholders.
   c. GIS (Geographic Information System) Technology: Provides appraisers with access to maps, property data, and demographic information.

B. Increased Education Requirements:
a. Higher Standards: Starting around 2003 and fully implemented by 2015, The Appraisal Qualifications Board of the Appraisal Foundation mandated greater educational standards.
b. College Degree: Limited entry to the certified levels to four year college graduates.

V. The Appraisal Profession Today: Challenges and Opportunities

A. Current Challenges

1. Appraiser Shortage: The appraisal profession faces a shortage of qualified appraisers, particularly in rural areas. This shortage can lead to longer turnaround times and higher appraisal fees.

2. Compliance Costs: The regulatory burden on appraisers has increased significantly, leading to higher compliance costs and administrative burdens.

3. Pressure from Lenders and AMCs: Appraisers often face pressure from lenders and appraisal management companies (AMCs) to meet unrealistic deadlines or provide inflated valuations.

B. Future Opportunities

1. Technological Advancements: New technologies, such as artificial intelligence and machine learning, have the potential to revolutionize the appraisal process and improve efficiency.

2. Specialization: Appraisers can specialize in niche areas, such as commercial real estate, complex properties, or litigation support.

3. Consulting Services: Appraisers can expand their services to include consulting, providing expert advice on real estate valuation and market analysis.

4. Increased Demand for Expertise: As the real estate market becomes more complex, there is an increasing demand for qualified appraisers who can provide accurate and reliable valuations.

VI. Conclusion

The appraisal profession has undergone a dramatic transformation, evolving from a system based on apprenticeship to one governed by strict regulations and advanced technology. While challenges remain, the future holds significant opportunities for qualified appraisers who are willing to embrace change and adapt to the evolving needs of the real estate market. The shift towards greater education and technological integration signifies a profession striving for higher standards of accuracy, transparency, and professionalism.