Appraisal Ethics and Standards

Chapter 14: Appraisal Ethics and Standards

This chapter delves into the critical aspects of appraisal ethics and standards within the framework of property rights, easements, liens, and co-ownership. We will examine the historical context leading to standardized practices, the role of key organizations, and the specific ethical obligations and competency requirements expected of appraisers. Understanding these principles is paramount to ensuring credible and reliable property valuations, ultimately upholding the public trust in real estate transactions.

I. Historical Context and the Need for Standardization

Prior to the late 20th century, the appraisal industry lacked comprehensive regulation. This absence contributed to inconsistencies and questionable practices, significantly impacting the savings and loan (S&L) crisis of the 1980s. The crisis highlighted the necessity for industry-wide standards of competence and professional conduct.

• Pre-1980s: Limited government oversight, reliance on individual professional association standards.
• S&L Crisis: Questionable appraisal practices contributed to financial instability.
• Response: Development of uniform standards and increased government regulation.

II. Key Organizations Shaping Appraisal Standards

The modern appraisal landscape is largely shaped by a few key organizations, primarily the Appraisal Foundation and its associated boards.

A. The Appraisal Foundation (TAF)

• Establishment: Formed in 1987 by nine professional appraisal associations to promote professionalism and uniform standards.
• Mission: “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.”
• Legal Basis: The Financial Institutions Reform, Recovery, and Enforcement Act of 1989 (FIRREA) incorporated USPAP into law and mandated state certification/licensing based on recognized standards.

B. Appraisal Standards Board (ASB)

• Role: Develops, interprets, and updates the Uniform Standards of Professional Appraisal Practice (USPAP).
• Functions: Promotes the acceptance of USPAP and updates the standards to reflect industry changes.

C. Appraiser Qualifications Board (AQB)

• Role: Establishes minimum education, examination, and experience requirements for appraiser certification and licensing.
• Functions: Develops and continuously updates the Real Property Appraisal Qualification Criteria.

D. Appraisal Practices Board (APB)
* Role: Codifies and implements best practices and applications for appraisers.

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

USPAP represents the cornerstone of appraisal ethics and standards in the United States. It provides a framework for developing and communicating credible appraisal results.

A. Components of USPAP:

• Preamble: Introduction to the purpose and structure of USPAP.
• Ethics Rule: Defines ethical obligations regarding conduct, management, confidentiality, and record-keeping.
• Competency Rule: Requires appraisers to possess the necessary knowledge and experience for an assignment.
• Scope of Work Rule: Defines the extent of research and analysis required for a credible assignment.
• Jurisdictional Exception Rule: Allows for deviations from USPAP when required by law.
• Definitions: Provides precise meanings of key appraisal terms.
• Standards: Ten specific standards outlining the development and reporting requirements for various appraisal disciplines.
• Statements on Appraisal Standards: Clarifications, interpretations, and elaborations on the Standards.
• Advisory Opinions: Guidance on applying USPAP to specific appraisal situations (non-binding).

B. Key Principles within USPAP:

1. Ethics Rule: This rule ensures integrity, objectivity, and ethical conduct in appraisal practice.

   • Conduct: Avoid misleading or fraudulent behavior.
   • Management: Prohibits contingent compensation arrangements and false advertising.
   • Confidentiality: Protect client information; disclosure limited to client authorization, legal mandate, or peer review.
   • Record Keeping: Maintain detailed records of appraisals (written or oral) for a specified period.

2. Competency Rule: Prevents appraisers from accepting assignments beyond their expertise.

   • Exception: Disclosure of lacking qualifications to the client and taking steps to ensure competent appraisal performance.

3. Scope of Work Rule: Defines the necessary depth of research and reporting.

   • The appraiser determines the appropriate scope, considering the intended use, complexity of the property, and available data.
   • Client desires should not compromise the credibility of the appraisal.
   • Credibility Criteria: An appraisal must be credible, i.e. worthy of belief.
   • Scope of work acceptability:
     • The scope of work must include the research and analyses that are necessary to develop credible appraisal results.
     • The scope of work must comply with USPAP.
   • An appraiser must be prepared to support the decision to exclude any investigation, information, method, or technique that would appear relevant to the client, intended users, or the appraiser’s peers.
   • An appraiser cannot ignore something. If it is not applicable, an explanation must be given.

4. Jurisdictional Exception Rule: Addresses conflicts between USPAP and local laws.

   • Example: If a local statute requires an appraiser to disclose confidential information, the Jurisdictional Exception Rule may apply, allowing the appraiser to comply with the law without violating USPAP’s confidentiality provisions.

C. USPAP Standards (Figure 14-7 of provided PDF)

The standards of professional appraisal practice are the specific procedures required to be used by the appraiser.
It is important to note that Standards 4 and 5 were retired in 2016.

IV. Certification and Licensing Requirements

FIRREA mandates state certification and licensing for appraisals related to “federally related transactions.” States manage the process, setting their own requirements that meet or exceed federal minimums.

A. Qualifying Education:

• The AQB sets minimum educational requirements for different license levels. (See Figure 14-3 of provided PDF)
• College education is a fundamental component for the requirements and licensing.

B. Supervisory and Trainee Requirements:

• Trainee Appraiser and Supervisory Appraiser are required to complete an AQB approved Supervisory/Trainee Appraisers course.
• Supervisory Appraisers must be state-certified and in good standing.

C. License Levels and Basic Education:

• Trainee (AT): 150 Hours + a 15-hour National USPAP Course (Must also complete an approved Supervisory/ Trainee Appraisers course).
• Residential (AL): 150 Hours + a 15-hour National USPAP Course + 30 College Semester Units.
• Certified Residential (AR): 200 Hours + a 15-hour National USPAP Course + Bachelor’s Degree.
• Certified General (AG): 300 Hours + a 15-hour National USPAP Course + Bachelor’s Degree.

D. Core Curriculum (Figures 14-4 and 14-5 of provided PDF):

Applicants must complete a minimum number of acceptable hours and specific modules (see Basic Education Modules as required by the Appraisal Qualifications Board (AQB).

E. Scope of Practice

• Residential Certification: Focuses on residential properties.
• General Certification: Qualifies appraiser for all property types, emphasizing the income approach.

V. Professional Organizations and Ethics Codes

Besides TAF and its boards, professional appraisal organizations play a vital role in promoting ethical conduct and professional development. (See Figure 14-2 of provided PDF for list of professional appraisal sponsors of the Appraisal Foundation). Some of these organizations have their own codes of ethics, standards, and continuing education requirements.

A. National Association of Independent Fee Appraisers (NAIFA) Code of Ethics (Example):

• Professional Conduct: Members must maintain a beneficial conduct.
• Fees: Contingent fees are prohibited.
• Appraisal Reports: Reports must include specific information such as purpose, legal description, property characteristics, and analysis.
• Certification Statement: Must be included in each appraisal.
• Professional Practice: Includes provisions against unfair competition and the protection of confidential information.

B. Appraisal Management Companies (AMCs)

• AMCs maintain a pool of qualified appraisers to provide appraisals. Federal guidelines require banks to have a “firewall” between lenders and appraisers. Appraisal management companies add a buffer between lender and appraisers and help consumers obtain unbiased reports for financing and loan servicing.

VI. Errors and Omissions Insurance (E&O)

Appraisers are vulnerable to liability for mistakes. E&O insurance provides coverage for errors and omissions, but not for intentional misrepresentation.

VII. Appraisal Review and Reporting

Standard 3 of USPAP focuses on appraisal review development and reporting. Review assignments must include:

• Identification of the work under review
• Identification of the property
• Effective date of the opinions and conclusions
• Analysis of the report under review
• Disclosure of the scope of work
• Disclosure of any services regarding the subject property within the prior three years
• Opinions and conclusions

VIII. Mathematical Formulas and Equations (Example - not comprehensive):

While appraisal involves qualitative judgment, quantitative analysis plays a role. Some common formulas include:

• Gross Rent Multiplier (GRM):

  $GRM = \frac{Sale\ Price}{Gross\ Annual\ Rent}$

  • This is used in the income approach to value, especially for residential properties.
  • Capitalization Rate (Cap Rate):

  $Cap\ Rate = \frac{Net\ Operating\ Income}{Property\ Value}$

  • This is used in the income approach to value, especially for commercial properties.
  • Adjustments in Sales Comparison Approach
    *Adjustments are made to comparable properties to equalize property to subject property.

IX. Ethical Scenarios and Examples

• Scenario 1: Undue Influence: A lender pressures an appraiser to inflate a property value to facilitate a loan approval. Ethical Violation: Violates the Ethics Rule, specifically related to conduct and independence. Correct Action: Refuse the request, document the attempt, and potentially report the lender.
• Scenario 2: Lack of Competence: An appraiser accepts an assignment to value a complex industrial property without prior experience in this type of property. Ethical Violation: Violates the Competency Rule. Correct Action: Decline the assignment or associate with a competent appraiser.
• Scenario 3: Confidentiality Breach: An appraiser discusses the details of a client’s appraisal with a third party without the client’s permission. Ethical Violation: Violates the Confidentiality section of the Ethics Rule. Correct Action: Maintain client confidentiality at all times unless authorized or legally required to disclose.

X. Conclusion

Adherence to appraisal ethics and standards is paramount for maintaining public trust in the real estate market. A thorough understanding of USPAP, the role of key organizations, and individual ethical obligations is essential for all appraisers. Continuous professional development and a commitment to ethical conduct are the cornerstones of a successful and credible appraisal career.

XI. Resources

• The Appraisal Foundation: www.appraisalfoundation.org
• California Bureau of Real Estate Appraisers (BREA): www.brea.ca.gov
• Texas Appraiser Licensing & Certification Board (TALCB): www.talcb.texas.gov