What Makes an Appraisal Worthy of Belief? USPAP!

(by William M. Novotny, AQB Certified USPAP Instructor) The Uniform Standards of Professional Appraisal Practice (USPAP) establish minimum requirements for appraisers in order that they are better able to act ethically and competently when serving the public. By complying with USPAP, appraisers can clearly demonstrate to clients that their opinions, analyses and conclusions are worthy of belief—a benchmark by which public trust in the appraisal procession is measured.

But more than appraisal skill and expertise are required to render credible appraisal assignment results. In order to consider the assignment results credible enough to be relied upon, clients must believe that the appraiser has performed the assignment in an ethical, competent, objective and unbiased manner. By complying with USPAP and certifying in the assignment report that they do so, the appraiser provides the client with reason for having such a belief.

The Structure of USPAP

The requirements of USPAP are established in its following sections, each of which requires compliance:

DEFINITIONS
PREAMPLE
Four RULES
Ten STANDARDS and Standards Rules
Statements on Appraisal Standards (SMT)

Additional guidance that illustrates how USPAP applies in the real world is provided by the Advisory Opinions (AO), Frequently Asked Questions (FAQ) and the Master Index, which allows the reader to fully research a topic by means of references to the various parts of the USPAP document in which the topic is addressed.

Appraisal Process

USPAP establishes what is referred to as the “appraisal process,” which is a systematic process for solving valuation problems. All appraisers follow this process in order to resolve valuation problems regardless of the type of property being appraised, be it real property, personal property, or a business enterprise and intangible assets.

STANDARD 7 of USPAP follows the appraisal development process that is applicable to personal property appraisals, and it can even be used as a checklist to ensure that none of its following seven steps are overlooked:

Step 1: Define the Appraisal Problem. This step requires that the following assignment elements be identified:

Identify the client and other intended users
Identify the intended use of the appraiser’s opinions and conclusions
Identify the type and definition of value to be used
Identify the effective date of the appraiser’s opinions and conclusions
Identify the item and its relevant property characteristics
Identify any applicable assignment conditions (limiting conditions, extraordinary assumptions, hypothetical conditions, jurisdictional exceptions)

Step 2: Determine the Scope of Work

Step 3: Select the Appropriate Market, Collect Data

Step 4: Apply Approach to Value

Step 5: Analyze Listings or Prior Sales

Step 6: Reconcile Value Indicators, Arrive at Final Value Opinion

Step 7: Report Assignment Results

Problem Identification

Step 1, defining the appraisal problem, is critical to the appraisal process. Problem identification forms the foundation upon which the appraiser determines the scope of work, i.e., the extent of inspection, identification, research and analyses necessary to develop his or her opinions, analyses and conclusions. In other words, defining the problem drives the entire appraisal development phase of the assignment.

An appraisal assignment begins when a would-be client presents a valuation problem to an appraiser who must then identify the various elements that define the problem. Because of the critical role problem identification plays in the appraisal process, USPAP gives it prominence by integrating and referring to problem identification throughout the USPAP document.

Scope of Work

Appraisers have broad flexibility and significant responsibility in determining the scope of work necessary to develop credible assignment results (relative to the intended use of the appraisal). For the scope of work to be acceptable, the appraiser’s actions must be consistent with the actions peers would take in similar assignments and must meet or exceed the expectations of typical users of appraisal reports resulting from similar assignments.

No one benefits from there being too much or too little research and analysis—too little causes unreliable opinions while too much wastes time and incurs needless expense. The appraiser’s responsibility is to do the amount of work deemed necessary to ensure the development of credible assignment results. The scope of work actually performed should result in a credible and meaningful answer to the appraisal problem posed in the form of either an oral or written appraisal report that complies with USPAP’s STANDARD 8.

Competency

USPAP requires that the appraiser be capable of performing the assignment, i.e., the appraiser must be “competent.” Only after determining that he or she can complete the assignment competently can the appraiser accept the assignment.

The COMPETENCY RULE of USPAP states:

The appraiser must determine, prior to accepting an assignment, that he or she can perform the assignment competently. Competency requires:

the ability to properly identify the problem to be addressed; and

the knowledge and experience to complete the assignment competently; and

recognition of, and compliance with, laws and regulations that apply to the appraiser or to the assignment.

Comment: Competency may apply to such factors as, but not limited to, an appraiser’s familiarity with a specific type of property, a market, a geographic area, an intended use, specific laws and regulations, or an analytical method….

Competency requires the appraiser to be capable of evaluating, understanding and identifying:

The subject property
The appropriate market
The conditions of the sale (cash equivalence, duress, reasonable exposure time, etc.)
The legal, economic and geographic factors relevant to the assignment
Any applicable laws and regulations
The appraiser’s USPAP obligations
Necessary appraisal theory and applicable appraisal techniques and methodology

Ethical Obligations

USPAP is specifically designed to address ethical issues—the compliance with which is so essential to establishing and maintaining public trust in appraisal practice.

Historically, ethical violations by appraisers have resulted in abuses costing taxpayers billions of dollars. Public trust requires that the appraiser has an ethical mindset and performs competently. There can be no public trust without the appraiser strictly adhering to the ETHICS RULE of USPAP which requires the appraiser to conduct him or herself in a manner that is objective, independent, impartial and in conformance with the requirements of USPAP.

USPAP Not an Afterthought

USPAP is an afterthought for some appraisers—it is frequently regarded as a dry, boring, time-consuming, irrelevant and burdensome obligation that is hard to understand. This attitude undermines the frame of mind that allows USPAP to come alive and become exceedingly relevant to each appraisal assignment.

Many personal property appraisers do not realize that USPAP represents the minimum requirements with which they are obligated to comply. Without satisfying the minimum requirements of USPAP an appraiser is unable to be confident that his or her report is worthy of belief by the client.

The goal of this article is to help the appraiser understand how the various parts of USPAP apply throughout the appraisal process and to every appraisal assignment, and in so doing, to encourage the appraiser to apply the requirements of USPAP to their daily practice.

Before finishing up an assignment, ask yourself:

Have I properly identified the problem and does my report properly answer the questions that were posed by the client?
Is my report credible enough that my client should feel comfortable placing his or her reliance on my opinions, analyses and conclusions?

Signing the USPAP certification statement, is, in effect, attesting to your opinion that the answer to these questions is an unqualified “Yes!”