Appraisal Standards & Ethical Compliance

This chapter delves into the critical aspects of appraisal standards and ethical compliance, cornerstones of the real estate appraisal profession. We will explore the scientific underpinnings of these standards, their practical applications, and the consequences of non-compliance.

1. Introduction to Appraisal Standards

Appraisal standards are a set of guidelines and rules that govern how appraisals should be conducted and reported. They ensure consistency, accuracy, and impartiality in the valuation process. The most widely recognized appraisal standards in the United States are the Uniform Standards of Professional Appraisal Practice (USPAP).

USPAP: Developed and maintained by the Appraisal Standards Board (ASB) of The Appraisal Foundation, USPAP establishes ethical and performance standards for appraisers. Compliance with USPAP is often required by law or regulation for appraisers in the US.
The Appraisal Foundation: A non-profit organization chartered by Congress, oversees the ASB, the Appraisal Qualifications Board (AQB), and the Appraisal Practices Board (APB).
- AQB: Concerned with education, testing, and experience requirements for appraiser certification and licensing.
- APB: Identifies and issues opinions on recognized valuation methods and techniques for voluntary appraisal guidance.
Financial Institutions Reform, Recovery, and Enforcement Act (FIRREA): This act mandates appraisal licensing or certifications for designated federally related lending as well as appraisal standards.

2. Scientific Principles Underlying Appraisal Standards

The foundation of appraisal standards rests on several core economic and statistical principles:

Supply and Demand: Market value❓ is determined by the interaction of supply and demand in a specific market at a specific point in time. Appraisal standards require appraisers to analyze and report on these market forces.
Substitution: A buyer will pay no more for a property than the cost of acquiring an equally desirable substitute. This principle guides the selection and adjustment of comparable properties in the sales comparison approach.
Anticipation: Value is based on the expectation of future benefits. Appraisal standards mandate that appraisers consider future income streams, appreciation, and other factors that might affect value.
Contribution: The value of a component is measured by its contribution to the overall value of the property, not by its cost. This applies to evaluating improvements and amenities.
Highest and Best Use: The most probable and legal use of a property that is physically possible, appropriately supported, financially feasible, and results in the highest value. Appraisal standards require appraisers to analyze the highest and best use as part of the valuation process.

3. Key Components of USPAP

USPAP is organized into several sections, each addressing a specific aspect of appraisal practice:

Preamble: Introduces USPAP and its purpose.
Ethics Rule: Sets forth ethical obligations for appraisers, including impartiality, objectivity, and confidentiality.
Competency Rule: Requires appraisers to possess the necessary knowledge and skills to perform an assignment competently.
Scope of Work Rule: Requires appraisers to develop a scope of work that is adequate to produce credible assignment results.
Jurisdictional Exception Rule: Allows appraisers to deviate from USPAP requirements if those requirements are contrary to law or regulation.
Standards Rules 1-10: Specific requirements for different types of appraisal assignments. These standards cover topics such as:
- Standard 1 & 2: Real Property Appraisal, Development and Reporting.
- Standard 3 & 4: Appraisal Review, Development and Reporting.
- Standard 5 & 6: Mass Appraisal, Development and Reporting.
- Standard 7 & 8: Personal Property Appraisal, Development and Reporting.
- Standard 9 & 10: Business Appraisal, Development and Reporting.

4. Ethical Considerations in Appraisal Practice

Ethical conduct is paramount in the appraisal profession. Appraisers must act with integrity, objectivity, and impartiality. Common ethical violations include:

Bias: Allowing personal opinions or external pressures to influence the appraisal.
Conflicts of Interest: Having a financial or personal interest in the property being appraised.
Confidentiality Breaches: Disclosing confidential information about the client or the property.
Incompetence: Accepting assignments for which the appraiser lacks the necessary knowledge or skills.
Failure to Disclose: Not disclosing relevant information about the property, the assignment, or the appraiser’s qualifications.
Appraising to a Pre-Determined Value: Influencing the appraisal to match a desired value is unethical and violates USPAP.

5. Practical Applications and Examples

To illustrate the application of appraisal standards and ethical principles, consider the following examples:

Example 1: Sales Comparison Approach & Adjustments

An appraiser is using the sales comparison approach to value a residential property. Comparable sales have differences, and adjustments are necessary. Let’s say Comparable A has a superior view, worth \$10,000, but is 100 square feet smaller, where each square foot contributes \$50 to value. The subject property has a 1,500 sq ft, and Comparable A has 1,400 sq ft. The adjustment to Comparable A would be:

Adjustment = View + (Size Difference * Value per sq ft)

Adjustment = \$10,000 + (100 sq ft * \$50/sq ft) = \$10,000 + \$5,000 = \$15,000

The appraiser increases the price of Comparable A by \$15,000 to account for these differences. All adjustments must be supported by market data.
Example 2: Income Approach & Capitalization Rate

An appraiser is valuing an income-producing property using the direct capitalization method. They estimate the net operating income (NOI) to be \$50,000. To determine the appropriate capitalization rate, the appraiser analyzes comparable sales of similar properties. Let’s say similar properties have sold at cap rates between 8% and 10%. Using the following formula:

Value = NOI / Capitalization Rate

If a cap rate of 9% is selected (based on market analysis):

Value = \$50,000 / 0.09 = \$555,555.56

The appraiser must support the capitalization rate selection with credible market data and explain the rationale for choosing a specific rate within the observed range.
Example 3: Highest and Best Use Analysis

A vacant lot is zoned for either residential or commercial development. The appraiser must analyze which use would yield the highest value. A simplified analysis might involve:
- Residential: Potential for a single-family home with an estimated value of \$400,000, development costs of \$250,000, leading to land value = Value - Cost = \$400,000 - \$250,000 = \$150,000
- Commercial: Potential for a small retail building with an estimated value of \$600,000, development costs of \$400,000, leading to land value = Value - Cost = \$600,000 - \$400,000 = \$200,000
In this simplified scenario, commercial development would be the highest and best use as it yields the higher land value, thus maximizing the property’s value.
Example 4: Ethical Violation

An appraiser is contacted by a homeowner who wants to refinance their mortgage. The homeowner pressures the appraiser to inflate the value of the property so that they can qualify for a larger loan. The appraiser, knowing that this would be unethical and a violation of USPAP, refuses to comply and withdraws from the assignment.

6. Consequences of Non-Compliance

Failure to comply with appraisal standards and ethical principles can have serious consequences, including:

Disciplinary Actions: State appraisal boards can suspend or revoke an appraiser’s license or certification.
Legal Liability: Appraisers can be sued for negligence, fraud, or breach of contract.
Reputational Damage: Loss of credibility and trust within the industry.
Criminal Penalties: In some cases, intentional violations of appraisal laws can result in criminal charges.

7. Experiments and Data Analysis

Market Analysis: Conduct a market analysis exercise to determine the typical range of capitalization rates for apartment buildings in a specific area. Analyze recent sales data and income statements to derive cap rates.
Comparable Selection: Practice selecting comparable sales for a subject property and making appropriate adjustments based on market data. Conduct paired data analysis to quantify the value of specific features.
Highest and Best Use Scenarios: Develop different highest and best use scenarios for a vacant site and analyze their financial feasibility. Conduct sensitivity analysis to assess how changes in market conditions would affect the optimal use.

8. Maintaining Competency

Appraisal standards require appraisers to maintain competency throughout their careers. This involves:

Continuing Education: Taking courses and attending seminars to stay up-to-date on current appraisal practices and regulations.
Professional Development: Participating in professional organizations and networking with other appraisers.
Staying Informed: Reading industry publications and monitoring changes in the real estate market.

9. Conclusion

Adherence to appraisal standards and ethical principles is essential for maintaining the integrity and credibility of the real estate appraisal profession. By understanding the scientific foundations of these standards, their practical applications, and the consequences of non-compliance, appraisers can provide accurate, reliable, and unbiased opinions of value.

Chapter Summary

Summary: Appraisal Standards & Ethical Compliance

This chapter, “Appraisal Standards & Ethical Compliance,” within the “Mastering Real Estate Appraisal” course, comprehensively addresses the critical intersection of professional standards and ethical conduct in real estate appraisal. The core theme revolves around adherence to the Uniform Standards of Professional Appraisal Practice (USPAP), which are developed and maintained by the Appraisal Standards Board (ASB) and overseen by The Appraisal Foundation. The chapter details the importance of USPAP compliance for maintaining public trust and ensuring reliable appraisal services.

Main Scientific Points:

USPAP as the Cornerstone: The chapter highlights USPAP as the ethical and performance standard for appraisers, emphasizing its role in promoting objectivity, impartiality, and independence in appraisal practice. It emphasizes that adhering to USPAP is not merely a suggestion but a requirement for maintaining professional competence and credibility.
Key Components of USPAP: The summary explains key elements of USPAP, including its introductory provisions, definitions, rule❓s (Ethics, Competency, Scope of Work), and standards. Special attention is given to defining appraisal, appraisal review, and appraisal consulting to show what aspects of professional duty are covered under USPAP guidance.
The Appraisal Process & USPAP: The importance of an orderly process is emphasized, tracing the eight steps of appraisal to highlight critical areas that fall under USPAP rules, namely defining the appraisal problem, collecting/analyzing data, performing a Highest and Best Use analysis, applying all three approaches to value❓, reconciling value indicators, and reporting the value estimate. USPAP provides guidance for scope of work and extraordinary assumptions in any of these processes.
ethics rule❓ and competency rule❓: The Ethics Rule within USPAP is explicitly discussed, focusing on requirements for impartiality, objectivity, and the avoidance of conflicts of interest. Also, the Competency Rule focuses on the appraiser’s responsibility to have the knowledge and experience to perform an assignment competently, or to properly disclose❓ a lack of it and take necessary steps to achieve competency.
Scope of Work Rule: Scope of Work dictates the parameters of the appraisal assignment, including intended use, intended users, type of value, effective date, and assignment conditions. The chapter emphasizes the importance of clear communication with the client to establish a well-defined scope of work that meets their needs while adhering to USPAP requirements.
Appraisal Reporting Standards: The summary points out USPAP’s specific reporting requirements, depending on the type of report. Different appraisal report types (Self-Contained, Summary, Restricted) have different minimum standards for contents.
Appraisal Foundation & its Boards: The summary underscores the role of The Appraisal Foundation, along with its Appraisal Standards Board (ASB) and Appraisal Qualifications Board (AQB), in developing, interpreting, and promoting appraisal standards and appraiser qualifications.
FIRREA & Appraiser Qualifications: The summary touches on the Financial Institutions Reform, Recovery, and Enforcement Act (FIRREA) which mandates state licensing and certification of appraisers for federally related❓ transactions. The Appraisal Qualifications Board (AQB) plays a crucial role in establishing minimum education, experience, and examination requirements for appraiser licensing and certification.

Conclusions:

Adherence to appraisal standards and ethical guidelines, primarily through USPAP compliance, is fundamental to maintaining the integrity and reliability of the real estate appraisal profession. This ensures public trust, protects consumers, and supports sound decision-making in real estate transactions.

Implications:

Legal and Regulatory Compliance: Appraisers must be aware of and comply❓ with USPAP requirements to avoid disciplinary actions, lawsuits, and potential criminal charges.
Professional Reputation: Ethical conduct and adherence to standards are essential for building and maintaining a positive professional reputation.
Consumer Protection: By providing unbiased and well-supported value opinions, appraisers contribute to fair and transparent real estate markets, protecting the interests of both buyers and sellers.
Financial Stability: Sound appraisal practices❓ support the stability of the financial system by ensuring that real estate assets are accurately valued, reducing the risk of lending and investment decisions based on inflated or inaccurate appraisals.
Evolution of Standards: Appraisers must stay informed about updates and changes to USPAP, as the standards are periodically revised to reflect new developments in appraisal theory and practice.

Appraisal Standards & Ethical Compliance