Significance of USPAP

Transcription

1 Page 1 of 10 USPAP and the Personal Property Appraiser by David J. Maloney, Jr., AOA CM and William M. Novotny, ISA AM, GCA Originally published in the Journal of Advanced Appraisal Studies All professions, including personal property appraising, have three hallmarks in common: 1) advanced training in a learned discipline, 2) adherence to an enforced code of ethics, and 3) a responsibility to society to act in a professional manner. The first two of these hallmarks are easily understood, but what is meant by "acting in a professional manner"? While all citizens have an obligation to exercise reasonable care to avoid injury to others, a professional, by virtue of his or her special training and skill, and adherence to an enforced code of ethics, is held to a higher "standard of care" while in the performance of his or her profession. A standard of care is that level of prudence and caution expected of an individual who has a "duty of care" to another, i.e., who has a responsibility to avoid harming another while practicing his or her profession. If it is determined that the professional failed to adhere to a reasonable standard of care and as a result did, indeed, breach his or her duty of care, that professional might be charged with professional negligence (malpractice) and could be held liable for damages in a civil court of law. The hallmark of a professional appraiser that he or she "act in a professional manner" is characterized not by a standard of care of what a reasonable person would do, but rather by a standard of care commensurate with what another "reasonable professional appraiser" having comparable experience and training would do in a similar circumstance. Since 1987, this standard of care for all three disciplines of appraising (including real property, personal property, and business property) has been defined by the Uniform Standards of Professional Appraisal Practice (USPAP) as promulgated by The Appraisal Foundation (TAF) of Washington, DC. Significance of USPAP In brief, the purpose of USPAP is to promote and maintain a high level of public trust in appraisal practice by establishing requirements for appraisers. Since its inception, USPAP has grown in significance to become the only nationally-recognized, generally-accepted standard for appraisers of personal property, real property, and business property. In the US, USPAP compliance is required not only by appraisal organizations but also by client user groups as well as many local, state and Federal agencies. USPAP also has an international following. Many appraisal associations in Asia, Europe, and North and South America have accepted USPAP for use by their members. Immediately following its promulgation in 1987, USPAP was considered by many personal property appraisers as being most relevant to the real property appraising community - nearly to the exclusion of the personal property appraiser. USPAP was written, amended and interpreted almost exclusively by real property appraisers largely

2 Page 2 of 10 for use by the real property appraising community. Indeed, the personal property appraisal Standards 7 and 8 in early versions of USPAP were mirror images of their real property appraisal counterparts, Standards 1 and 2, with the only difference being the substitution of the term "personal property" for the term "real property." Subsequently, personal property appraisers found the early USPAP courses irrelevant and less than helpful in understanding how USPAP applied within their discipline of personal property. The failure of the personal property appraiser community to immediately embrace USPAP was due largely to a lack of understanding of the standard (few personal property appraisers made the effort to attend USPAP training), the lack of USPAP courses designed from the personal property appraiser's point of view, the existence of societal standards thought by many members to be adequate enough, and the desire to avoid societal mandates to abide by yet another standard the worth of which had yet to be proven (or understood.) Over the past 20 years, however, many changes have occurred which have resulted in a USPAP that is now very sensitive to the needs and requirements of the personal property appraiser. There are now carefully trained and tested Certified National USPAP Course Instructors (some of whom come from within the personal property appraisal discipline.) In 2008, TAF introduced a personal property version of the National USPAP Course featuring discussion examples and scenarios taken from the discipline of personal property appraising. The Appraisal Foundation has become more inclusive by proactively involving personal property appraisers into its deliberations as well as encouraging their participation in TAF advisory groups such as The Appraisal Foundation Advisory Council (TAFAC) and the Industry Advisory Council (IAC). As USPAP developed and became more popular with user groups, those groups began demanding personal property appraisals written in accordance with USPAP. Recognizing the increasing significance the public was placing on USPAP-compliant reports, personal property appraisal societies, in turn, began requiring that their members learn and comply with USPAP despite their being differences between the sophisticated standard of USPAP and homegrown societal standards. Societal standards developed by personal property appraisal organizations have existed in one form or another prior to USPAP and those standards continue to exist. Societal standards, however, do not receive the public exposure of USPAP nor do they have the universal acceptance currently enjoyed by USPAP. What is more, societal standards were typically developed by only a few members (sometimes as few as one) based only on their personal experience(s) and research but with little if any input from other appraisers or appraisal user groups. Sadly, too, societal standards are seldom, if ever, updated. Contrast this to USPAP for which the Appraisal Standards Board (ASB) (the ASB is an independent body within The Appraisal Foundation charged with the development and

3 Page 3 of 10 interpretation of USPAP) is constantly monitoring the appraisal community as well as the needs of the marketplace for appraisals, appraisal user groups, the public at large, and (for the real property discipline) the needs of Federal and State regulators. The ASB regularly issues exposure drafts soliciting comments from the public through written or oral public testimony on proposed changes to USPAP. Public meetings on the changes are held throughout the year across the country in an endeavor to be as accessible and inclusive as possible. USPAP is written and amended by highly-trained and experienced appraisers from all disciplines making use of a sophisticated system of soliciting input from other appraisers, appraisal societies, appraisal user groups, and regulators as well as the public at large. Is it any wonder that USPAP is so highly respected and accepted while societal standards remain relatively unknown except among their respective memberships? USPAP has developed into a standard that: Is sensitive to the needs of the personal property appraiser Incorporates issues that are specific to personal property appraisal assignments Remains relevant because the ASB continuously solicits input from personal property appraisers and their appraisal organizations Is now taught by certified USPAP instructors from within the personal property discipline. As an additional argument for the significance of USPAP, one may also wish to review Section 1219 of the Pension Protection Act of 2006 (PPA) which contains relatively new rules relating to what constitutes a qualified appraiser and qualified appraisal for certain Federal tax purposes. The act raises the bar for both, but relevant to this discussion is the new requirement that appraisals done for certain Federal tax purposes now be conducted by a qualified appraiser in accordance with generally accepted appraisal standards. The PPA goes on to state that the appraisal will be treated as having been conducted in accordance with generally accepted appraisal standards if, for example, the appraisal is consistent with the substance and principles of the Uniform Standards of Professional Appraisal Practice ( USPAP ), as developed by the Appraisal Standards Board of The Appraisal Foundation. This recent recognition by the Federal government of the importance of USPAP is yet another reason that the personal property appraiser should become trained in and apply USPAP to all their appraisal assignments. For these reasons, over the past two decades personal property appraisers have come to better understand USPAP and its role in fostering public trust by improving the quality and professionalism of the appraiser s performance. To best serve their members, personal property appraisal societies would be wise to recognize the currency, applicability and usefulness of USPAP and restructure and maintain their societal standards accordingly. USPAP Fosters Trust The professional expertise of a personal property appraiser is needed by the public to answer important questions regarding the value of property. Often, important financial

4 Page 4 of 10 decisions are to be made based on conclusions reached by the appraiser. What is a fair price to ask for the item I am selling? What is a fair price to pay? Are the items being divided equitably among us heirs? How much tax will I save with this donation? How much in estate taxes will have to be paid? But the public needs more than the skill and expertise of the appraiser. The public must have a basis on which to establish trust that the appraiser will act in an ethical and competent manner. Appraisal opinions, analyses and conclusions must be supported by fact and must be objective, independent, impartial and unbiased in order for there to be a basis for trust between appraiser and client. An appraiser s conclusions must be credible to the client as well as to other intended users, and they must be relevant to the intended use of the appraisal. It is USPAP that provides those standards which, when followed, result in a foundation on which public trust can be based and by which credible appraisal reports can be developed. Remember, too, that USPAP is the minimum standard necessary to support credible results and to maintain the public trust; accordingly, appraisals failing to meet USPAP requirements are inadequate and reflect poorly on the appraiser and on the appraisal profession. So, what exactly is contained within the Uniform Standards of Professional Appraisal Practice? USPAP in Brief USPAP is intended for use by both appraisers as well as users of appraisal services. Not only does USPAP serve as a guideline for appraisers so they can practice at the highest level of competence, but USPAP also serves as a gauge so that the public can measure the competency of the appraiser and the quality of the appraiser s work product. USPAP develops common definitions, rules and appraisal methodology to standardize the development of the assignment as well as the reporting of the assignment results. In managing both the ethical and the performance side of appraisal practice, USPAP provides a common basis for all appraisal practice including appraisals, appraisal review and appraisal consulting. The four Rules (Ethics Rule, Competency Rule, Scope of Work Rule, and Jurisdictional Exception Rule) of USPAP cover general practice policies while the ten Standards are elaboration on these policies as they pertain to the three disciplines (real property, personal property, business property) and to various types of assignments. In addition to the Rules and Standards, USPAP also contains a Preamble, a Definitions section and Statements on Appraisal Standards. 1. The Preamble sets the tone and direction for all the components and aspects of USPAP. It is in the Preamble where the essence of USPAP can be found: The purpose of the Uniform Standards of Professional Appraisal Practice (USPAP) is to promote and maintain a high level of public trust in appraisal practice by establishing requirements for appraisers. It is essential that appraisers develop and communicate their analyses, opinions, and conclusions to

5 Page 5 of 10 intended users of their services in a manner that is meaningful and not misleading. The Appraisal Standards Board promulgates USPAP for both appraisers and users of appraisal services. The appraiser s responsibility is to protect the overall public trust and it is the importance of the role of the appraiser that places ethical obligations on those who serve in this capacity. USPAP reflects the current standards of the appraisal profession. (Preamble USPAP Edition) 2. The Definitions section defines selected terms that are specific and peculiar to USPAP and that are not necessarily consistent with definitions found outside USPAP or that are developed by professional appraisal organizations or individual authors. The terms contained in the Definitions permeate virtually all USPAP discussions pertaining to appraisal, appraisal review and appraisal consulting assignments. 3. The Ethics Rule establishes requirements for the appraiser to be objective, impartial, and to conduct him/herself in an ethical manner. The Ethic Rule has four components: a. Conduct: must be impartial, objective and independent; no advocacy b. Management: no undisclosed fees or unethical contingency fees c. Confidentiality: must protect the confidential nature of client relationship d. Record Keeping: must establish and maintain a work file for appraisal, appraisal review or appraisal consulting assignments. The work file must include: 1) The name of the client and the identity, by name or type, of other intended users 2) True, signed copies of any written reports 3) Summaries of any oral reports or testimony, or a transcript of testimony 4) The appraiser s signed and dated certification statement 5) All other data, information, and documentation necessary to support the appraiser s opinions and conclusions and to show compliance with USPAP. 4. The Competency Rule places an obligation upon the appraiser to determine prior to accepting an assignment as well as throughout the assignment that he or she possesses the necessary knowledge and talents to complete the assignment in a professional manner. The appraiser is expected to be competent and have sufficient product and market knowledge including of the geographical area and local market. To the extent necessary, the appraiser must have adequate understanding of: a. The subject property

6 Page 6 of 10 b. The market for the property and its market acceptability. c. Alternative marketplaces which compete for the property d. The knowledge and motivation of typical sellers and buyers e. The terms and conditions of the sale (reasonable exposure in an open market) f. Supply and demand relationships relevant to the time frame, the property type and its quality and value-relevant characteristics The Competency Rule allows the appraiser to remediate a lack of knowledge. It requires disclosure of the deficiency to the client prior to accepting the assignment or whenever, during the course of the assignment, the lack of knowledge or ability is discovered. The Rule also requires steps be taken to complete the assignment competently, and that the those steps be disclosed in the report. 5. The Scope of Work Rule requires the appraiser to identify the appraisal problem, to perform all the steps necessary to produce a credible assignment result, and to disclose those steps within the appraisal report. Scope of work is the work an appraiser performs to develop assignment results. The scope of work must be relevant to the intended use of the appraisal and should be sufficient to inspire confidence in the appraiser s stated opinions and conclusions. USPAP defines scope of work as follows: Scope of work includes, but is not limited to: a. the extent to which the property is identified; b. the extent to which tangible property is inspected; c. the type and extent of data researched; and d. the type and extent of analyses applied to arrive at opinions or conclusions. Appraisers have broad flexibility and significant responsibility in determining the appropriate scope of work for an appraisal, appraisal review, and appraisal consulting assignment. (Scope of Work Rule USPAP Edition) Proper assignment problem identification is necessary to make a proper scope of work decision, i.e., the type and amount of work that must be done to produce credible assignment results. The Scope of Work Rule places greater emphasis on this initial problem identification and, once the problem is identified, on the development of the appropriate scope of work necessary to develop credible assignment results. Regarding problem identification, USPAP notes that the identification of the appraisal problem to be solved requires that the appraiser identify the following assignment elements:

7 Page 7 of 10 a. Client and any other intended users b. Intended use of the appraiser's opinions and conclusions c. Type and definition of value used d. Effective date of the appraiser s opinions and conclusions e. Subject of the assignment and it s value-relevant characteristics f. Assignment conditions (e.g., assumptions, extraordinary assumptions, hypothetical conditions, laws and regulations that affect scope of work, limiting conditions, jurisdictional exceptions - Authors) (Scope of Work Rule USPAP Edition) According to the Scope of Work Rule, an appraiser s scope of work is acceptable when it generates credible assignment results which meet or exceed: a. The expectations of parties who are regularly intended users for similar assignments; and b. What an appraiser s peers actions would be in performing the same or a similar assignment. (Scope of Work Rule USPAP Edition) The scope of work performed must also be disclosed within the appraisal report so that clients and other intended users who rely on the assignment results can understand what the appraiser did (including the type and extent of research and analysis) in order to reach his or her stated opinions or conclusions. 6. The Jurisdictional Exception Rule recognizes that local law and public policy take precedence over USPAP should a conflict exist. Should a conflict occur, those parts of USPAP which are in conflict with local law or public policy are null and void, but the remaining parts of USPAP remain intact. 7. The ten Standards establish guidelines for 1) developing the appraisal, appraisal review or consulting assignment, and 2) reporting the final opinion or conclusion of the appraisal, appraisal review or consulting assignment. Standards vary by discipline (real property, personal property, business property) and by the type of assignment: a. Standards 1 and 2 establish the requirements for developing and reporting real property appraisals. b. Standard 3 sets requirements for the development and reporting of reviews of appraisals, appraisal consulting or other appraisal review assignments. c. Standards 4 and 5 establish requirements for developing and reporting the results of real property consulting services. (This standard does not apply to the appraisal of personal property.) d. Standard 6 sets requirements for the development and reporting of mass appraisals for ad valorem tax and other purposes. While this Rule applies primarily to the appraisal of real property, in some rare circumstances it also pertains to personal property appraisals.

8 Page 8 of 10 e. Standards 7 and 8 establish the requirements for developing and reporting personal property appraisals (i.e., Standards 7 and 8 establish the appraisal process.) f. Standards 9 and 10 establish the requirements for developing and reporting business and intangible property appraisals. 8. The Statements on Appraisal Standards are generated by the ASB and are specifically designed for the purpose of clarification, interpretation, explanation and elaboration on USPAP. Statements on Appraisal Standards carry the full weight of a Standard and, like the balance of USPAP, are only adopted after public exposure and comment. Note that beginning with the Edition, USPAP is bound for the convenience of reference along with Advisory Opinions and Frequently Asked Questions (FAQs) both of which, while not enforceable parts of USPAP, do illustrate the applicability of USPAP to specific appraisal situations and demonstrate how USPAP can resolve specific appraisal problems. USPAP and the Appraisal Process The appraisal process is established by Standards 7 and 8 and consists of the development phase followed by the reporting phase. The appraisal process begins with the appraiser understanding the appraisal problem. The appraisal problem can be a simple one such as in a straight forward insurance appraisal, or it can be complex such as in the case of a contentious divorce or an appraisal of a decedent s estate which contains very valuable works of art. In addition to providing ethical and performance guidelines, USPAP recognizes that there exists a clear and distinct appraisal process that all appraisers, regardless of discipline, use in order to solve their appraisal problem. USPAP proves helpful by promoting a systematic model for all appraisers to follow to ensure a logical approach to solving the appraisal problem. USPAP provides six appraisal process steps which form a template to follow to resolve valuation problems from the time of initial acceptance of an assignment to the preparation of the final report. The steps are: Step 1. This is the problem identification phase which is always at the beginning of the development process. The appraiser defines the problem through communication with the client. With the exception of relevant property characteristics, all the below information is obtained from the client. (Knowing these elements of information serves to direct the appraiser in defining the assignment s scope of work.) Problem identification requires that the appraiser: a. Identify the client and other intended users

9 Page 9 of 10 b. Identify the intended use of the appraisal (Donation? Estate? Acquiring insurance?) c. Identify the type, definition and source of the value being used (Replacement value? Market value type?) d. Identify the effective date of the appraisal e. Identify the property and its value-relevant property characteristics and attributes that are pertinent to the intended use of the appraisal as well as to the type and definition of value being used f. Identify relevant assignment conditions (e.g., assumptions, extraordinary assumptions, hypothetical conditions, laws and regulations that affect scope of work, limiting conditions, jurisdictional exceptions) Step 2. Based on Step 1, determine the appropriate Scope of Work required to produce credible assignment results. At the same time, the appraiser needs to ascertain that he or she is or is not competent to perform the assignment and to resolve issues regarding lack of competence should they exist. Step 3. Collect and analyze data and markets Step 4. Apply the relevant approache(s) to value Step 5. Reconcile value indicators and arrive at a final opinion of value Step 6. Prepare a report of the defined value opinions. Summary In the past, USPAP was frequently a poorly-understood afterthought in the personal property appraiser s tool kit of professional practices. It was often regarded by appraisers as an annoying requirement that was confusing and cost time and money. Some appraisers regarded it as a burdensome obligation that is dry and boring and that they would rather avoid. But no more. USPAP has developed into a standard which provides well-grounded and frequently updated rules, guidance and methodology for the personal property appraiser. Most, if not all, appraisal societies now require USPAP education and USPAP-compliant reports of their members. What is more, Federal requirements mandating compliance with generally accepted standard such as USPAP now place USPAP in the forefront. But more importantly, USPAP provides the foundation for ethical and professional appraisal reports which instills trust and confidence in users of appraisals and which helps ensure that appraisers provide the standard of care expected of a professional. It is for these reasons we feel it is more important than ever that personal property appraisers be indoctrinated at the earliest point in the importance and relevancy of USPAP to the professional appraisal practice. From initial training in the basic principles,

10 Page 10 of 10 theory and methodology of appraising personal property to conference seminars and educational courses required for requalification, USPAP should be at the core as the single, nationally-recognized standard for the professional appraiser. Course designers as well as text book authors should ensure that USPAP forms the core of their offerings. Bibliography 1. The Appraisal Foundation, Uniform Standards of Professional Appraisal Practice (USPAP) Edition. Washington, DC: Appraisal Standards Board, Maloney, Jr., David J., Appraising Personal Property: Principles and Methodology. Frederick, MD: Appraisers Press, Maloney, Jr., David J., The Personal Property Appraiser s Guide to USPAP. Frederick, MD: Appraisers Press, 2009 About the Authors William Novotny has been a full-time personal property appraiser since He has completed hundreds of professional appraisal reports and has appraised over 10,000 properties for clients. Novotny has served as a designated expert witness and has provided testimony at deposition or trial on numerous occasions. He qualified as an Accredited Member of the International Society of Appraisers (ISA) in 1996 and has requalified in 2001 and In 2002 Novotny was certified as a national instructor of the Uniform Standards of Professional Appraisal Practice (USPAP) by the Appraiser Qualification Board (AQB) of the Appraisal Foundation in Washington DC. He was the first personal property appraiser to attain this distinction. David Maloney is a Certified personal property appraiser with over twenty-five years of experience. A veteran appraisal course writer and instructor, he is the recipient of numerous honors including the International Society of Appraisers (ISA) Lifetime Achievement Award. Maloney has served as President of the Association of Online Appraisers, as Vice President of the ISA, on the Board of Directors of the Claims Prevention and Procedure Council, and as Chairman of the Emerging Issues Committee of The Appraisal Foundation Advisory Council. In addition, for fourteen years he authored Maloney s Antiques & Collectibles Resource Directory, hailed as a Best Reference Book by the Library Journal. Most recently, Maloney wrote Appraising Personal Property: Principles & Methodology 2 nd Edition (Appraisers Press, 2008, 416 pgs.) and its supplement, The Personal Property Appraiser s Guide to USPAP (Appraisers Press, 2009, 76 pgs.) For more about the books or about USPAP and appraising courses offered by Maloney and Novotny, visit