The Appraisal Profession: Foundations and Standards

I. Introduction: The Significance of the Appraisal Profession

The appraisal profession plays a critical role in ensuring stability and fairness in real estate and financial markets. Appraisers provide impartial opinions of value, which are essential for informed decision-making in transactions involving real property, personal property, and businesses. This chapter lays the groundwork for understanding the foundations of the appraisal profession, including its evolution, the organizations that govern it, and the standards that guide professional practice.

II. Historical Development and the Role of Professional Organizations

A. Early Appraisal Practices

Historically, appraisals were often informal and lacked standardized methods. This subjectivity created opportunities for bias and inconsistency, leading to unreliable value estimates.

B. Emergence of Professional Organizations

The need for greater accuracy and credibility led to the formation of professional appraisal organizations. These organizations played a pivotal role in developing ethical guidelines, establishing educational requirements, and promoting best practices. Examples include:

• American Society of Appraisers (ASA): Offers designations across various appraisal disciplines.
• American Society of Farm Managers and Rural Appraisers (ASFMRA): Focuses on agricultural and rural property appraisal.
• Appraisal Institute: An international professional association of real estate appraisers, known for its rigorous education and certification programs.
• International Society of Appraisers (ISA): Specializes in personal property and machinery & equipment appraisals.
• National Association of Independent Fee Appraisers (NAIFA): Provides designations for independent fee appraisers.
• Royal Institution of Chartered Surveyors (RICS): An international organization promoting professionalism and standards in land, property, infrastructure, and construction.

These organizations contribute to the appraisal profession by:

1. Setting Standards: Establishing criteria for membership, including education, experience, and examination requirements.
2. Providing Education: Offering courses, seminars, and publications to enhance appraisers’ knowledge and skills.
3. Enforcing Ethics: Implementing codes of conduct and disciplinary procedures to maintain professional integrity.
4. Promoting Research: Supporting studies that advance appraisal theory and methodology.

C. Peer Review and Enforcement

Professional organizations enforce standards of conduct through peer review. This process involves evaluating an appraiser’s work by other qualified professionals to ensure compliance with ethical and professional guidelines. Disciplinary actions may include:

1. Corrective Action: Requiring additional training or modifications to appraisal practices.
2. Suspension: Temporarily revoking membership and appraisal privileges.
3. Expulsion: Permanently terminating membership and professional recognition.

III. The Appraisal Foundation and the Uniform Standards of Professional Appraisal Practice (USPAP)

A. The Savings and Loan Crisis and the Need for Reform

The savings and loan (S&L) crisis of the 1980s exposed significant weaknesses in appraisal practices. Inflated property values and fraudulent appraisals contributed to the collapse of numerous financial institutions. In response, the U.S. Congress enacted the Financial Institutions Reform, Recovery, and Enforcement Act (FIRREA) of 1989.

B. Formation of The Appraisal Foundation

FIRREA mandated the establishment of a qualified appraisal regulatory structure. Nine professional appraisal associations joined together to form the Uniform Standards of Professional Appraisal Practice (USPAP). The year 1987 also saw the birth of the APPRAISAL FOUNDATION, a non-profit corporation based in Washington, D.C. According to the bylaws of the Appraisal Foundation, its purpose is “to foster professionalism by helping to ensure that appraisers are qualified to offer their services and by promoting the Uniform Standards of Professional Appraisal Practice.”

C. FIRREA and the Adoption of USPAP

In 1989, the USPAP were incorporated into law through the Financial Institutions Reform, Recovery, and Enforcement Act of 1989 (FIRREA), commonly known as “the S&L bail-out bill.” This bill also required the states to begin certifying and licensing appraisers on the basis of recognized standards of competence.

D. Key Components of The Appraisal Foundation

The Appraisal Foundation operates through three independent boards:

1. Appraisal Standards Board (ASB): Responsible for developing, interpreting, and revising USPAP. The ASB issues Statements on Appraisal Standards (SAS) and Advisory Opinions (AO) to provide guidance on specific appraisal issues.
2. Appraiser Qualifications Board (AQB): Establishes minimum education, experience, and examination requirements for appraiser licensing and certification.
3. Appraisal Practices Board (APB): Serves to codify and implement the best practices and application for appraisers.

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

USPAP is the ethical and performance standard for appraisers in the United States. It promotes public trust by establishing requirements for:

1. Ethics: Maintaining impartiality, objectivity, and confidentiality.
2. Competency: Possessing the knowledge and skills necessary for appraisal assignments.
3. Scope of Work: Determining the appropriate level of research and analysis.
4. Reporting: Clearly and accurately communicating appraisal opinions and conclusions.

F. Key Elements of USPAP

USPAP consists of:

1. Preamble: An introduction that provides the overall context and purpose of USPAP.
2. Ethics Rule: Addresses conduct, management, confidentiality, and record keeping.
3. Competency Rule: Requires appraisers to have the necessary knowledge and experience.
4. Scope of Work Rule: Specifies the extent of research and analysis required.
5. Jurisdictional Exception Rule: Recognizes that local laws may affect USPAP applicability.
6. Definitions: Provides precise meanings for terms used in USPAP.
7. Standards: Ten specific guidelines for appraisal development and reporting:
   • Standard 1: Real Property Appraisal, Development
   • Standard 2: Real Property Appraisal, Reporting
   • Standard 3: Appraisal Review, Development, and Reporting
   • Standard 6: Mass Appraisal, Development, and Reporting
   • Standard 7: Personal Property Appraisal, Development
   • Standard 8: Personal Property Appraisal, Reporting
   • Standard 9: Business Appraisal, Development
   • Standard 10: Business Appraisal, Reporting

G. Advisory Opinions and Statements on Appraisal Standards

• Advisory Opinions (AO): Provide non-binding guidance on applying USPAP in specific situations.
• Statements on Appraisal Standards (SAS): Clarify, interpret, explain, or elaborate on existing standards.

H. Modifications to USPAP

The ASB has the authority to amend or modify the USPAP, as well as to issue Statements on Appraisal Standards and Advisory Opinions. Revised editions of the USPAP are issued each year, and mid-year updates may be issued as well. Appraisers must stay informed of the latest standards to ensure compliance.

IV. Licensing and Certification Requirements

A. State Regulation and FIRREA

FIRREA mandates that states license and certify appraisers who perform appraisals in federally related transactions. States have the authority to impose stricter requirements than the federal minimums.

B. Levels of Appraiser Credentialing

Typically, states offer multiple levels of appraiser credentials:

1. Trainee Appraiser (AT): Entry-level credential requiring completion of basic education and supervision by a certified appraiser.
2. Licensed Residential Appraiser (AL): Allows appraisal of non-complex one-to-four unit residential properties with a transaction value below a specified threshold.
3. Certified Residential Appraiser (AR): Permits appraisal of complex one-to-four unit residential properties, regardless of transaction value. Requires a bachelor’s degree or higher.
4. Certified General Appraiser (AG): Authorizes appraisal of all types of properties, including residential, commercial, and industrial. Requires a bachelor’s degree or higher.

C. Core Curriculum and Education Requirements

The AQB establishes minimum education requirements for each level of appraiser credentialing. Core curriculum modules include:

1. Basic Appraisal Principles: Fundamental concepts, definitions, and ethical considerations. (30 hours)
2. Basic Appraisal Procedures: Appraisal methods, data collection, and analysis techniques. (30 hours)
3. USPAP Course: Comprehensive training on the requirements and application of USPAP. (15 hours)
4. Residential Market Analysis & Highest and Best Use: Analysis of residential markets and determination of the most profitable, legally permissible, physically possible, and financially feasible use of a property. (15 hours - AT, AL & AR)
5. Residential Site Valuation & Cost Approach: Land valuation methods and the cost approach to value. (15 hours - AT, AL & AR)
6. Residential Sales Comparison & Income Approaches: Application of the sales comparison and income approaches to residential properties. (30 hours - AT, AL & AR)
7. Residential Report Writing & Case Studies: Writing appraisal reports and analyzing case studies. (15 hours - AT, AL & AR)
8. Statistics Modeling & Finance: Understanding statistical concepts, valuation models, and real estate finance principles. (15 hours - AT, AL & AR)
9. Advanced Residential Applications & Case Studies: Advanced techniques and case studies for complex residential properties. (15 hours - AR)
10. General Appraiser Market Analysis & Highest & Best Use: Market analysis and highest and best use determination for all property types. (30 hours - AG)
11. General Appraiser Sales Comparison Approach: Sales comparison approach for all property types. (30 hours - AG)
12. General Appraiser Site Valuation & Cost Approach: Land valuation and cost approach for all property types. (30 hours - AG)
13. General Appraiser Income Approach: Income approach for all property types. (60 hours - AG)
14. General Appraiser Report Writing & Case Studies: Report writing and case studies for all property types. (30 hours - AG)

Note: Education hour requirements may vary by state. Check with your state regulatory agency for specific requirements.

D. Experience Requirements

In addition to education, appraiser licensing and certification require a minimum number of experience hours. The required hours vary depending on the credential level.

E. Examination Requirements

All applicants must pass a state-administered examination to demonstrate competency in appraisal principles and practices.

F. Supervisory and Trainee (New Requirement)

Both supervisors and trainees are now required to complete an AQB approved Supervisory/Trainee Appraisers course.
Both the Trainee Appraiser and Supervisory Appraiser are required to complete an AQB approved Supervisory/Trainee Appraisers course. The Trainee Appraiser must complete the course prior to obtaining a Trainee Appraiser License, and the Supervisory Appraiser must complete the course prior to supervising a Trainee Appraiser. Existing credential holders can use this course regarding the roles and responsibilities of the Supervisor and Trainee Appraiser for continuing education.

A Supervisory Appraiser shall be state-certified and must be in “good standing” in the jurisdiction in which the Trainee Appraiser practices for a period of at least three (3) years. Supervisory Appraisers shall not have been subject to any disciplinary action within any jurisdiction within the last three (3) years that affects the Supervisory Appraiser’s legal eligibility to engage in appraisal practice. A Supervisory Appraiser subject to disciplinary action would be considered to be in “good standing” three (3) years after successful completion/termination of the sanction imposed against the appraiser.

A Supervisory Appraiser may not supervise more than three (3) Trainee Appraisers at one time. However, a Trainee Appraiser is permitted to have any number of Supervisory Appraisers.

V. Ethical Considerations and Professional Conduct

A. The Ethics Rule of USPAP

The Ethics Rule is a cornerstone of professional appraisal practice. It requires appraisers to:

1. Conduct: Act with integrity and avoid actions that could be misleading or fraudulent.
2. Management: Conduct business practices ethically, avoiding contingent compensation arrangements and undisclosed referral fees.
3. Confidentiality: Protect client information and appraisal results.
4. Record Keeping: Maintain accurate and complete records of appraisal assignments for a specified period.

B. Errors and Omissions Insurance

To protect against potential liability, appraisers should carry errors and omissions (E&O) insurance. This insurance covers losses resulting from unintentional mistakes or omissions in appraisal reports. It is important to note that E&O insurance does not cover intentional misrepresentation or fraudulent activity.

C. The Competency Rule of USPAP

The Competency Rule mandates that appraisers only accept assignments for which they are qualified by knowledge and experience. If an appraiser lacks the necessary competence, they must:

1. Disclose the lack of qualifications to the client.
2. Take steps to acquire the necessary competency.
3. Clearly describe the limitations in the appraisal report.

D. The Scope of Work Rule of USPAP

The Scope of Work Rule requires appraisers to determine the appropriate level of research and analysis necessary to produce a credible appraisal. Factors to consider include:

1. The intended use of the appraisal.
2. The complexity of the property.
3. The client’s requirements.
4. Peer expectations.

The scope of work must be adequate to develop credible assignment results.

VI. Appraisal Management Companies (AMCs)

A. The Role of AMCs

Appraisal Management Companies (AMCs) act as intermediaries between lenders and appraisers. They manage the appraisal process to ensure independence and compliance with regulations. AMCs help lenders comply with federal guidelines that require a “firewall” between lending decisions and appraisal opinions.

B. Functions of AMCs

AMCs perform the following functions:

1. Maintaining a pool of qualified appraisers.
2. Assigning appraisal assignments to appraisers.
3. Reviewing appraisal reports for compliance with USPAP.
4. Ensuring appraiser independence.

VII. Case Studies and Practical Applications

A. Case Study 1: Residential Appraisal

A licensed residential appraiser is asked to appraise a unique, historic home with numerous custom features. The appraiser lacks experience with historic properties and complex designs. To comply with the Competency Rule, the appraiser should:

1. Disclose their lack of experience to the client.
2. Consult with an experienced appraiser or take additional training.
3. Clearly document the limitations and assumptions in the appraisal report.

B. Case Study 2: Commercial Appraisal

A certified general appraiser is hired to appraise a large office building for a mortgage loan. The appraiser determines that the income approach is the most reliable valuation method. The appraiser must:

1. Obtain accurate income and expense data.
2. Analyze market rents and occupancy rates.
3. Develop a credible capitalization rate.
4. Clearly explain the income approach and supporting data in the appraisal report.

C. Experiment 1: Analysis of the Effect of Information Bias on Appraisal Values

Goal:
Determine if the disclosure of desired value information affects the appraisal value that is determined by appraiser.
Hypothesis:
Disclosure of desired value information positively correlates to the appraisal value determined.
Materials:
Two appraiser groups, one control and one testing.
Two identical properties.
Methods:
Control group will be given a property, and will perform a regular appraisal, with no outside data revealed.
Testing group will be given an identical property and will be informed of the value that the client desires.
Results:
Compare the two appraisal results, if desired value is closer to appraisal value from the testing group than the hypothesis is supported.

VIII. Conclusion

The appraisal profession is built on a foundation of ethical conduct, competency, and adherence to established standards. The Appraisal Foundation and USPAP provide a framework for ensuring public trust and promoting accuracy in appraisal practice. Appraisers must continuously update their knowledge and skills to remain competent and compliant with evolving regulations and best practices. Understanding the foundations and standards of the appraisal profession is essential for success in this dynamic and critical field.