Real Estate Appraisal PowerPoint Presentation

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Real Estate Appraisal Understanding what you are asking for

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Your Instructor Alan F. Simmons, SRPA 2

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SSo – How’s your day going?

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What is an Appraiser? Appraiser is defined as   One who is expected to perform valuation services competently and in a manner that is independent, impartial, and objective.

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What are Valuation Services? Valuation services are defined as   services pertaining to aspects of property value. Comment: Valuation services pertain to all aspects of property value and include services performed both by appraisers and by others.

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What is Appraisal Practice? Appraisal practice is defined as   Valuation services performed by an individual acting as an appraiser, including, but not limited to appraisal, appraisal review, or appraisal consulting

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What is an Appraisal? Appraisal is defined as   The act or process of developing an opinion of value.

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What is an Appraisal Review? Appraisal Review is defined as   The act or process of developing and communicating an opinion about the quality of another appraiser’s work that was performed as part of an appraisal, appraisal review, or appraisal consulting assignment.

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What is Appraisal Consulting? Appraisal Consulting is defined as The act or process of developing an analysis, recommendation, or opinion to solve a problem, where an opinion of value is a component of the analysis leading to the assignment results.  Comment: An appraisal consulting assignment involves an opinion of value but does not have an appraisal or an appraisal review as its primary purpose.

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FIRREA In 1989, Title XI of the Federal Financial Institutions Reform, Recovery and Enforcement Act (FIRREA) required the federal government to issue regulations to protect federal financial and public policy interests in real estate transactions that require the service of an appraiser. The policy procedures and enforcement was passed along to the individual states.

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The Appraisal Foundation The Appraisal Foundation was formed, in 1987, as a not-for-profit organization, established exclusively for educational and scientific purposes. It copyrighted the Uniform Standards of Professional Appraisal Practice (USPAP).   Title XI also authorized that USPAP be the basis for standards for the states to use in licensing appraisers.

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The Appraisal Foundation The Appraisal Foundation has a Board of Trustees and two independent boards. The Appraisal Standards Board (ASB) has exclusive authority to adopt, change, or modify the content of USPAP. The Appraiser Qualifications Board (AQB) exercises all authority over the establishment of education and experience for licensing, certification, and recertification of appraisers.

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The Appraisal Standards Board The ASB sets the policies through USPAP. These consist of two components: ethical standards and performance standards. The ethical standards dictate standards of personal behavior and prohibit such things as misleading or fraudulent activities. The performance standards define the minimum requirements for undertaking an appraisal assignment and reporting the results.

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Ethical Standards In the Conduct Section of the ETHICS RULE of USPAP it says: In appraisal practice, an appraiser must not perform as an advocate for any party or issue.  An appraiser must not communicate assignment results in a misleading or fraudulent manner.

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Performance Standard In STANDARD 1 of USPAP, it says: In developing a real property appraisal, an appraiser must identify the problem to be solved, determine the scope of work necessary to solve the problem, and correctly complete research and analyses necessary to produce a credible appraisal

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Enforcement The Appraisal Foundation does not have any legal authority to enforce USPAP. Enforcement occurs through having been adopted by government agencies. If an appraiser is in violation of USPAP, complaints may be made to the state licensing authorities in the state in which the appraiser is licensed or certified. They have the power to investigate and to impose fines and suspension or revocation of a license or certification.

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Appraiser Categories

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Complex Property Complex is defined in the Code of Federal Regulations (12 CFR, Section 34.42) as   one in which the property to be appraised, the form of ownership, or the market conditions are atypical.

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Finding Appraisers How do you find appraisers? The Appraisal Subcommittee (which oversees the Appraisal Foundation) maintains a current roster of licensed and certified appraisers for the whole country. You can search for an appraiser by area and by their credential. Click on www.ASC.gov. Then click on National Registry at the top left.

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Appraisal Subcommittee

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Client Client is defined as The party or parties who engage an appraiser (by employment or contract) in a specific assignment.  If a lender hires an appraiser to perform an assignment – they are the client. But what if the appraiser is contracted by a management company. Who then is the client? In most cases, the management company would be acting as an agent of the client (the lender).

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Appraiser/Client Relationship An appraiser enters into an appraiser-client relationship in each assignment. The appraiser owes his client due diligence and there is a bond of confidentiality (similar to the confidentiality that occurs in a relationship between an attorney and a client).

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Confidentiality The Confidentiality provision of the ETHICS RULE of USPAP states that An appraiser must protect the confidential nature of the appraiser-client relationship. An appraiser must act in good faith with regard to the legitimate interests of the client in the use of confidential information and in the communication of assignment results

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Confidentiality, Cont’d An appraiser must be aware of, and comply with, all confidentiality and privacy laws and regulations applicable in an assignment.  An appraiser must not disclose confidential information or assignment results prepared for a client to anyone other than the client and persons specifically authorized by the client; state enforcement agencies and such third parties as may be authorized by due process of law

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Intended User Intended user is defined as   The client and any other party as identified, by name or type, as users of the appraisal, appraisal review, or appraisal consulting report by the appraiser on the basis of communication with the client at the time of the assignment.

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Intended User The identity of the intended users may influence the scope of work necessary to properly develop the appraisal report. If Fannie Mae is an intended user, then the report needs to be developed according to their guidelines. If FHA or VA are intended users, then the report must conform to their requirements.

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Client The appraisal rules adopted by the Federal Financial Institutions Regulatory Agencies in August 1990 to comply with Title XI of FIRREA impose a requirement on regulated institutions that “if an appraisal is prepared by a fee appraiser, the appraiser shall be directly engaged by the regulated institution or its agent…

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Client “In some cases, however, a property owner might directly engage the services of an appraiser for one intended use, but later desire to use the appraisal report in a federally related loan transaction. This and other similar scenarios lead to the question: “Does an appraiser have an obligation to ensure that his or her services are directly engaged by a federally regulated financial institution?” From Advisory Opinion AO-25 of USPAP

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Federally Related Transaction The term is defined in Title XI of FIRREA as any real estate-related financial transaction which — (A) a federal financial institutions regulatory agency or the Resolution Trust Corporation engages in, contracts for, or regulates; and (B) requires the services of an appraiser. From Advisory Opinion AO-30 of USPAP

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Client Obligations “USPAP requires an appraiser to identify the intended use and intended users in an appraisal assignment. USPAP also requires that an appraiser not be misleading in the marketing of their services. In order to not be misleading when contacted by a prospective client the appraiser’s obligation is one of proper disclosure.” From Advisory Opinion AO-25 of USPAP

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Client Obligations “Before an appraiser accepts an assignment knowing the intended use of the appraisal is, or may be, for a federally related transaction by a federally regulated financial institution, it is that appraiser’s responsibility to disclose to the prospective client that the lender or its agent is required to directly engage the appraiser.” From Advisory Opinion AO-25 of USPAP

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Client Obligations “The appraiser should also disclose to the prospective client that it is unethical for the appraiser to later ‘readdress’ or otherwise change the report to indicate a federally regulated financial institution was the client when the appraisal was performed for another party.” From Advisory Opinion AO-25 of USPAP

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Client Obligations “If the client still wishes to proceed with the appraisal after the appraiser has properly fulfilled these disclosure obligations, the appraiser can accept the assignment. It would be prudent to recite disclosures in the engagement letter and in the report.” From Advisory Opinion AO-25 of USPAP

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Illustration “A buyer of a commercial building contacts appraiser Jane Johnson about appraising the property for financing. The buyer explains that he will likely be providing the report to an insurance company that is interested in financing the property.” From Advisory Opinion AO-25 of USPAP

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Illustration “The insurance company has no problem with the buyer being the client, as long as the insurance company is identified as an intended user in this assignment. However, the buyer says that he may also make application to his local bank, a federally regulated financial institution. Can Jane accept this assignment? If so, does she have any disclosure obligations?” From Advisory Opinion AO-25 of USPAP

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Illustration “Answer: Jane has an obligation to disclose to the buyer that the federally regulated financial institution should not accept her appraisal report because a lender or its agent is required to directly engage the services of an appraiser in a federally related transaction. If the buyer still wants to engage Jane, her disclosure allows her to accept the assignment.” From Advisory Opinion AO-25 of USPAP

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Readdressing a Report “After an assignment has been completed and the report has been delivered, an appraiser may be asked to “readdress” (transfer) the report to another party.  Does USPAP allow an appraiser to “readdress” (transfer) a report by altering it to indicate a new recipient as the client or additional intended user when the original report was completed for another party?” From Advisory Opinion AO-26 of USPAP

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Readdressing a Report “No. Once a report has been prepared for a named client(s) and any other identified intended users and for an identified intended use, the appraiser cannot ‘readdress’ (transfer) the report to another party.” From Advisory Opinion AO-26 of USPAP

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Readdressing a Report “Identification of the client, any other intended users, and the intended use are key elements in all assignments. Because these identifications drive the appraiser’s scope of work decision, as well as other elements of the assignment, they must be determined at the time of the assignment. They cannot be modified after an assignment has been completed.” From Advisory Opinion AO-26 of USPAP

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Updating a Report “Once an appraisal of a property, or an appraisal consulting assignment, has been completed, there are many cases in which a client may need a subsequent appraisal or analysis involving the same property.” Clients sometimes label such requests as ‘updates,’ ‘reappraisals,’ or ‘recertifications.’” From Advisory Opinion AO-3 of USPAP

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Updating a Report “The term ‘Recertification of Value’ is often mistakenly used by some clients in lieu of the term ‘Update.’ A Recertification of Value is performed to confirm whether or not the conditions of a prior appraisal have been met. A Recertification of Value does not change the effective date of the value opinion.” From Advisory Opinion AO-3 of USPAP

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Updating a Report “Regardless of the nomenclature used, when a client seeks a more current value or analysis of a property that was the subject of a prior assignment, this is not an extension of that prior assignment that was already completed – it is simply a new assignment.” From Advisory Opinion AO-3 of USPAP

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Appraising the Same Property for a New Client “Situations often arise in which appraisers who have previously appraised a property are asked by a different party to appraise the same property.  In some instances this request arises very soon after the first appraisal; in others, it may be months or years later. Under what circumstances can an appraiser accept an assignment to appraise a property for a prospective client when that appraiser has previously completed an appraisal of the same property for another client?” From Advisory Opinion AO-27 of USPAP

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Appraising the Same Property for a New Client “As can be seen in the definitions, both the client and the assignment results are specific to an assignment.  If there is a new potential client, valuation services performed for that new client would constitute a new assignment and the assignment results would be specific to that new assignment.  Therefore, acceptance and performance of the new assignment to appraise the same property would not be considered revealing the first client’s assignment results to the second client, even if the value conclusions were the same. “ From Advisory Opinion AO-27 of USPAP

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Appraisals for Use by a Federally Regulated Financial Institution “In order to comply with Title XI of FIRREA, the federal financial institutions regulatory agencies of the United States have adopted appraisal regulations and guidelines. These laws, regulations and guidelines are established to protect federally insured depository institutions and include the requirement that appraisals be prepared in compliance with USPAP.” From Advisory Opinion AO-30 of USPAP

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Appraisals for Use by a Federally Regulated Financial Institution The agencies’ appraisal regulations state, in part: “If an appraisal is prepared by a staff appraiser, that appraiser must be independent of the lending, investment, and collection functions and not involved, except as an appraiser, in the federally related transaction, and have no direct or indirect interest, financial or otherwise, in the property. “ From Advisory Opinion AO-30 of USPAP

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Appraisals for Use by a Federally Regulated Financial Institution “If the only qualified persons available to perform an appraisal are involved in the lending, investment, or collection functions of the regulated institution, the regulated institution shall take appropriate steps to ensure that the appraisers exercise independent judgment. “ From Advisory Opinion AO-30 of USPAP

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Appraisals for Use by a Federally Regulated Financial Institution “Such steps include, but are not limited to, prohibiting an individual from performing an appraisal in connection with federally related transactions in which the appraiser is otherwise involved and prohibiting directors and officers from participating in any vote or approval involving assets on which they performed an appraisal.” From Advisory Opinion AO-30 of USPAP

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Appraisals for Use by a Federally Regulated Financial Institution “For federally related transactions, all appraisals shall, at a minimum: (a) Conform to generally accepted appraisal standards as evidenced by USPAP promulgated by the Appraisal Standards Board of the Appraisal Foundation, unless principles of safe and sound banking require compliance with stricter standards;” From Advisory Opinion AO-30 of USPAP

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Appraisals for Use by a Federally Regulated Financial Institution “(b) Be written and contain sufficient information and analysis to support the institution's decision to engage in the transaction; (c) Analyze and report appropriate deductions and discounts for proposed construction or renovation, partially leased buildings, nonmarket lease terms, and tract developments with unsold units;” From Advisory Opinion AO-30 of USPAP

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Commonly Asked Questions How do the assignment conditions that apply to appraisals for use by a federally regulated financial institution affect the appraiser’s scope of work and report content? From Advisory Opinion AO-30 of USPAP

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Commonly Asked Questions Answer: An appraiser accepting an assignment to be performed under the agencies’ appraisal regulations and guidelines is obligated to complete that assignment in a manner that adheres to the applicable appraisal regulations and guidelines. From Advisory Opinion AO-30 of USPAP

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Commonly Asked Questions What is a “real estate-related financial transaction”? From Advisory Opinion AO-30 of USPAP

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Commonly Asked Questions Answer: “any transaction involving — (1) The sale, lease, purchase, investment in or exchange of real property, including interests in property, or the financing thereof; or (2) The refinancing of real property or interests in real property; or (3) The use of real property or interests in property as security for a loan or investment, including mortgage-backed securities.” From Advisory Opinion AO-30 of USPAP

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Commonly Asked Questions Do the agencies’ appraisal regulations apply to FHA, VA, Fannie Mae, Freddie Mac, Farmer Mac, or Sallie Mae? From Advisory Opinion AO-30 of USPAP

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Commonly Asked Questions Answer: FHA, VA, Fannie Mae, Freddie Mac, Farmer Mac and Sallie Mae are not under the supervision of the federal financial institutions regulatory agencies and therefore are not subject to their appraisal regulations. From Advisory Opinion AO-30 of USPAP

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Scope of Work USPAP contains a SCOPE OF WORK RULE that says, In part:  For each appraisal, appraisal review, and appraisal consulting assignment, an appraiser must:  identify the problem to be solved; determine and perform the scope of work necessary to develop credible assignment results; and disclose the scope of work in the report.

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Scope of Work An appraiser must properly identify the problem to be solved in order to determine the appropriate scope of work. The appraiser must be prepared to demonstrate that the scope of work is sufficient to produce credible assignment results. Appraisers have broad flexibility and significant responsibility in determining the appropriate scope of work for an appraisal, appraisal review, and appraisal consulting assignment.

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Scope of Work Communication with the client is required to establish most of the information necessary for problem identification. However, the identification of relevant characteristics is a judgment made by the appraiser that requires competency in that type of assignment.

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Scope of Work An appraiser must not allow assignment conditions to limit the scope of work to such a degree that the assignment results are not credible in the context of the intended use.   An appraiser must not allow the intended use of an assignment or a client’s objectives to cause the assignment results to be biased.

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An Appraisal Review that Includes the Reviewer’s Own Opinion of Value “A client may want an appraiser, functioning as a reviewer, to develop and report his or her own opinion of value (i.e., an appraisal) within an appraisal review assignment. “ From Advisory Opinion AO-20 of USPAP

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An Appraisal Review that Includes the Reviewer’s Own Opinion of Value “This leads to two questions: How does the assignment change when the reviewer’s scope of work includes the development of his or her own opinion of value? What language in appraisal review reports indicates when the reviewer did or did not develop his or her own opinion of value?” From Advisory Opinion AO-20 of USPAP

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An Appraisal Review that Includes the Reviewer’s Own Opinion of Value “Appraisal review is a specialized area of appraisal practice. Appraisal reviews are used in a variety of business, governmental, and legal situations and also have an important role in the enforcement of professional standards.” From Advisory Opinion AO-20 of USPAP

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An Appraisal Review that Includes the Reviewer’s Own Opinion of Value “However, a client may also want the reviewer to develop and report his or her own opinion of value (an appraisal) within an appraisal review assignment. In this instance, the appraisal review assignment is actually a two stage assignment: an appraisal review plus a value opinion by the reviewer.” From Advisory Opinion AO-20 of USPAP

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An Appraisal Review that Includes the Reviewer’s Own Opinion of Value “The term ‘Appraisal Review’ is used in USPAP to identify the activity of a reviewer in an appraisal review assignment. Appraisers sometimes use such terms as ‘Desk Review,’ ‘Field Review,’ ‘Complete Review,’ ‘Administrative Review.’” From Advisory Opinion AO-20 of USPAP

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An Appraisal Review that Includes the Reviewer’s Own Opinion of Value “Rather than simply using labels, reviewers should also accurately define the scope of work — in fact, the Comment to Standards Rule 3-1(c) requires the reviewer to”…determine the scope of work necessary to produce credible assignment results in accordance with the SCOPE OF WORK RULE” From Advisory Opinion AO-20 of USPAP

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An Appraisal Review that Includes the Reviewer’s Own Opinion of Value “A reviewer’s scope of work in an appraisal review assignment is determined primarily by the purpose(s) of the assignment and the intended use of the assignment results. Standards Rule 3-1(a) requires, in part, that the reviewer “identify … the intended use of the reviewer’s opinions and conclusions and the purpose of the assignment.” From Advisory Opinion AO-20 of USPAP

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An Appraisal Review that Includes the Reviewer’s Own Opinion of Value “Examples of intended use include (without limitation) quality control, audit, qualification, or confirmation. Each type of intended use affects the scope of work that may be appropriate for a particular appraisal review assignment.” From Advisory Opinion AO-20 of USPAP

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An Appraisal Review that Includes the Reviewer’s Own Opinion of Value “When the reviewer’s scope of work includes developing his or her own opinion of value, the following apply: The reviewer’s scope of work in developing his or her own opinion of value may be different from that of the work under review. The effective date of the reviewer’s opinion of value may be the same or different from the date of the work under review..” From Advisory Opinion AO-20 of USPAP

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An Appraisal Review that Includes the Reviewer’s Own Opinion of Value “The reviewer is not required to replicate the steps completed by the original appraiser. Those items in the work under review that the reviewer concludes are credible and in compliance with the applicable development standard can be extended to the reviewer’s value opinion development process on the basis of an extraordinary assumption by the reviewer.” From Advisory Opinion AO-20 of USPAP

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An Appraisal Review that Includes the Reviewer’s Own Opinion of Value “Those items not deemed to be credible or in compliance must be replaced with information or analysis by the reviewer, developed in conformance with STANDARD 1, 4, 6, 7, or 9, as applicable, to produce a credible value opinion.” From Advisory Opinion AO-20 of USPAP

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Appraisal Review Report WITHOUT an Opinion of Value “The following are examples of language that might be used in an appraisal review report that does not express an opinion of value and thus does not constitute evidence of an appraisal by the reviewer: the value opinion stated in the appraisal report is (or is not) adequately supported” From Advisory Opinion AO-20 of USPAP

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Appraisal Review Report WITHOUT an Opinion of Value “the value conclusion is (or is not) appropriate and reasonable given the data and analyses presented” the value opinion stated in the report under review was (or was not) developed in compliance with applicable standards and requirements” From Advisory Opinion AO-20 of USPAP

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Appraisal Review Report WITH an Opinion of Value The following are examples of language that signify a value opinion : I concur (or do not concur) with the value I agree (or disagree) with the value in my opinion, the value is (the same)” in my opinion, the value is incorrect and should be $XXX in my opinion, the value is too high (or too low)” From Advisory Opinion AO-20 of USPAP