EDITION 7-HOUR RESIDENTIAL APPRAISAL REVIEW AND UNIFORM STANDARDS OF PROFESSIONAL APPRAISAL PRACTICE (USPAP) COMPLIANCE COURSE

Transcription

1 EDITION 7-HOUR RESIDENTIAL APPRAISAL REVIEW AND UNIFORM STANDARDS OF PROFESSIONAL APPRAISAL PRACTICE (USPAP) COMPLIANCE COURSE

2

3 Residential Appraisal Review and Uniform Standards of Professional Appraisal Practice (USPAP) Compliance Course Student Manual 7-Hour Course Reviewed and Updated By The Appraisal Standards Board (ASB) Approved By The Appraiser Qualifications Board (AQB) 2016 by The Appraisal Foundation. All Rights Reserved. Published in the United States of America.

4

5 The Appraisal Standards Board (ASB) of The Appraisal Foundation develops, interprets, and amends the Uniform Standards of Professional Appraisal Practice (USPAP) on behalf of appraisers and users of appraisal services. The Edition of USPAP ( USPAP) is effective January 1, 2016 through December 31, It is important that individuals understand and adhere to changes that are adopted in each edition of USPAP. State and federal regulatory authorities enforce the content of the current or applicable edition of USPAP. In addition, the Edition of USPAP contains guidance in the form of Advisory Opinions and over 300 USPAP Frequently Asked Questions (FAQ). These communications illustrate the applicability of Standards in specific situations and offer advice from the ASB for the resolution of specific appraisal issues and problems. To purchase a spiral bound or PDF copy of USPAP, please visit our website at ABOUT THE APPRAISAL FOUNDATION The Appraisal Foundation is the nation s foremost authority on the valuation profession. The organization sets the Congressionally-authorized standards and qualifications for real estate appraisers, and provides voluntary guidance on recognized valuation methods and techniques for all valuation professionals. This work advances the profession by ensuring appraisals are independent, consistent, and objective. More information on The Appraisal Foundation is available at CONNECT WITH US

6

7 APPRAISAL SPONSORS American Society of Appraisers International Society of Appraisers American Society of Farm Managers & Rural Appraisers International Right of Way Association Appraisers Association of America Massachusetts Board of Real Estate Appraisers Columbia Society of Real Estate Appraisers National Association of Independent Fee Appraisers Instituto de Evaluadores de Puerto Rico North Carolina Professional Appraisers Coalition International Association of Assessing Officers

8 AFFILIATE SPONSORS American Bankers Association National Association of REALTORS The Farm Credit Council The Farm Credit Council INTERNATIONAL SPONSOR Royal Institution of Chartered Surveyors

9 Table of Contents GENERAL COURSE INFORMATION Welcome Overview... ii Course Schedule... iv SECTION ONE Introduction From Your Perspective... 1 What is an Appraisal Review?... 4 The USPAP Connection... 9 SECTION TWO Applying USPAP to Review Assignments (Illustrations) The USPAP Connection (Continued) Reviewer s Responsibilities General Reminders for Appraisal Review Assignments APPENDIX One-Unit Residential Appraisal Field Review Report Residential Appraisal Review and USPAP Compliance Course, Student Manual i

10 Overview Course Description This 7-Hour Residential Appraisal Review and Uniform Standards of Professional Appraisal Practice (USPAP) Compliance Course has been developed by The Appraisal Foundation. The course focuses on appraisal review assignments and the effect USPAP has on these assignments, the reviewers, and the work of appraisers involved in the assignments. With the greater scrutiny that has been placed on appraisers and the appraisal reports they produce in the past several years and, the stricter regulations from all client levels, the demand for appraisal reviews has grown. Any appraiser who is completing assignments for lending institutions is having his or her work reviewed by various individuals who have checklists, and other requirements they are verifying in conjunction with the reports being produced. Some of these individuals are appraisers who are acting in the review capacity, while others are not appraisers. The appraisers whose work is under review may or may not be aware of either the review or the review results. This course is designed to aid real property appraisers seeking a better understanding of USPAP in conjunction with producing appraisal reviews that are USPAP compliant, as well as providing additional guidance to those appraisers whose work is being reviewed. Ideally, the review process should raise the level of professionalism among appraisers, and encourage them to produce better appraisal reports. In addition to the student manual, the USPAP Publication (including the USPAP Advisory Opinions, USPAP Frequently Asked Questions, and Index) is the required text for use in this and all other USPAP-related courses. Course Objectives Identify USPAP obligations when completing an appraisal review assignment. Recognize the importance of intended use and intended user in developing and reporting the results of an appraisal review assignment. Recognize the additional USPAP obligations necessary when an appraisal review assignment includes a reviewer s own opinion of value. Identify scope of work issues in a variety of appraisal review situations. Discuss key definitions within USPAP related to appraisal review. Recognize that the subject of an appraisal review assignment may be all or part of a report, workfile, or a combination of these. ii Residential Appraisal Review and USPAP Compliance Course, Student Manual

11 Identify the problem to be solved in the appraisal review assignment. Recognize appraisal review is a specialized area of appraisal practice. Recognize appraisal reviews are used in a variety of business, governmental, and legal situations, as well as in the enforcement of professional standards. In addition to lectures, the course includes discussion illustrations that show how USPAP applies in situations that appraisers encounter when completing residential appraisal review assignments. Classroom Guidelines To make the classroom environment a positive experience for all attendees, adherence to the following is required: No smoking in the classroom. Silence cell phones, laptops, tablets and any other electronic device when class is in session. Audio/video recording is prohibited. Refrain from ongoing conversations with those seated near you and other distracting behavior while class is in session. General Information Breaks. There will be two breaks during the morning session and two breaks during the afternoon session, unless noted otherwise by the course provider. The lunch break is generally for one hour. Attendance. Attendance sheets will be distributed during class to verify your attendance during the morning and afternoon sessions. Full attendance is required in order to obtain credit for this course. Certificates. Certificates of completion will be distributed by the provider after successful completion of the course. Residential Appraisal Review and USPAP Compliance Course, Student Manual iii

12 Course Schedule SECTION 1. Morning Introduction 10 Minutes Welcome and course announcements Introduction to the course Section 1 From Your Perspective (Open Ended Questions) What is an Appraisal Review? 60 Minutes* Qualifications of the Review Appraiser Morning Break The USPAP Connection 140 Minutes* Morning Break The USPAP Connection (Continued) SECTION 2. Afternoon Section 2 The USPAP Connection Advisory Opinion Minutes* Afternoon Break Applying USPAP to Review Assignments (Illustrations) Afternoon Break 100 Minutes* Reviewer s Responsibilities General Reminders for Review Assignments iv Residential Appraisal Review and USPAP Compliance Course, Student Manual

13 Section 1, Part 1. Introduction From Your Perspective Appraisal Review has gained attention in the past few years and has become the focus of work for many appraisers and others. Why is that? Are government agencies, lending institutions, the secondary market, appraisal management companies (AMC) and the litigation profession requesting more appraisal reviews now than in the past? Has government and public attention been drawn to the appraisal profession in light of the most recent economic downturn in the housing industry, and now the quickening uptick? The government s task of regulating financial institutions is altering the way users of appraisal services look at both the actual appraisal and the appraisal reviews. Both are under deeper scrutiny and often from more than one source. Are you getting more requests to complete appraisal reviews? What types of clients are contacting you? Are the requests of a routine nature or are there more twists to the assignments? Illustration 1 (Review Appraiser Bias?) An appraiser receives a request to review an appraisal; however, the reviewer has previously appraised the same property. Does the reviewer s prior experience with the property create a bias that then precludes an objective review? Take a few minutes to jot down your answer to this question. Residential Appraisal Review and USPAP Compliance, Student Manual 1

14 Illustration 2 (Appraisal Review and State Appraiser Boards) Is a reviewer permitted by USPAP to file a complaint with a state appraiser board without the consent of his or her client? Take a few minutes to answer to this question. 2 Residential Appraisal Review and USPAP Compliance, Student Manual

15 Do you have any questions relating to appraisal review that you would like to see discussed today? Let s start a list. We can add to the list as we move though the materials. Make sure your questions are answered during the day. Residential Appraisal Review and USPAP Compliance, Student Manual 3

16 Section 1, Part 2. What is an Appraisal Review? Appraisal reviews serve many important purposes. Some appraisal reviews are more time consuming and require research and analysis well beyond the original assignment, as do other types of reviews. At other times, the process is smooth with no problems. Many professions employ some sort of review process to ensure the preparation of thorough, well-documented reports. One of the difficulties that reviewers face in appraisal practice is recognizing that it is the work product being reviewed, and not the appraiser. Additionally, what the reviewer is being asked to do varies from assignment to assignment. I. Appraisal Review A. USPAP defines appraisal review 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 or appraisal review assignment. 1. Do you think that commenting on the quality of another appraiser s work means addressing: the entire report with attachments? only part of a report? an oral report? the workfile? any combination of these? 2. USPAP indicates the reviewer s opinion about the quality of the work under review may include addressing its completeness, relevance, appropriateness, and reasonableness, all in the context of the requirements applicable to that work. B. Why Appraisal Reviews are Needed 1. A professional review of an appraiser s work often makes sense as a prudent business practice for users of appraisal services. It is not unusual for clients in other professions to seek second opinions, so the appraisal profession is no different. 4 Residential Appraisal Review and USPAP Compliance, Student Manual

17 2. An appraisal review serves as a tool in measuring the credibility of the report by determining whether it supports a relevant development process. The review serves as a test of reasonableness to see if the methods and techniques used are appropriate to the assignment. 3. An appraisal review can reinforce a client s confidence in the appraisal report. The reviewer ascertains whether appropriate data has been gathered and examined, if the data has been analyzed logically, and whether the conclusions are consistent with the information presented in the report. 4. An appraisal review can help a lending institution client manage risk. Because appraisal reports are used in a business decision on the part of the client, an appraisal review lends a degree of due diligence to the process. Descriptive portions of a report can alert the lender to any additional risks associated with the property, while the value conclusions lends credence to the business decision. 5. Appraisal reviews are helpful in supporting litigation and dispute resolution matters. Often more than one appraisal report is prepared in these instances. Appraisal reviews lend credibility to conclusions of each, or show shortcomings. 6. Appraisal reviews are used to assess work products of appraisers for clients who have little knowledge of appraisal and/or have no internal appraisal capabilities. C. Purpose of Appraisal Reviews and Types of Appraisal Reviews 1. Appraisal reviews are completed for a variety of uses. Let s look at the ones that are most common: Quality control Compliance Qualifications Confirmation Dispute resolution Litigation 2. Clients request different types of reviews depending upon their needs. Based on the intended use of the review, they may be conducted by appraisers or by others. Some terms often associated with client review requests are not used in USPAP, but are used, often inappropriately, in day-to-day practice. Use of labels such as technical review, administrative review, compliance review, and a STANDARD 3 review, often cause Residential Appraisal Review and USPAP Compliance, Student Manual 5

18 confusion or misunderstanding as these terms do not impart the same meaning in every situation. Use of such terms should be avoided. Rather the key to an appropriate review is whether the client is requesting an appraisal review or a review that could be performed by someone other than an appraiser. Reviewers should accurately define the scope of work necessary to produce credible assignment results. An appraiser performing an appraisal review must consider the elements that are necessary for an appropriate identification of the problem. Communication with the client to develop a clear understanding of the purpose of the assignment and its intended use is of primary importance. 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 (SR) 3-2(b) requires the reviewer to identify the intended use of the reviewer s opinions and conclusions. The reviewer must also identify the purpose of the appraisal review This identification includes whether the reviewer has developed his or her own opinion of value or appraisal review opinion related to the work under review (See SR 3-2(c)). The scope of work will be discussed in more depth in the USPAP Connection section of the course. Let s look at the following review assignment illustrations, based on general purposes and intended uses. These demonstrate why it is important for the reviewer to develop an appropriate scope of work, rather than to interpret labels on review assignments. Which of the assignments are appraisal reviews and which are not? Do any overlap? a. The assignment is to consider information in an appraisal report as well as other information as part of the basis for a business decision. The review is to be used in the context of a broader business decision. b. The assignment is to check all calculations and determine if the appraisal report complies with basic content specifications. The reviewer is to note discrepancies or omissions of items outlined in the appraisal contract. c. This assignment is limited to a review of the data within the appraisal report, which is to be confirmed by the reviewer. The reviewer has not been asked to physically view the subject or comparable properties, but to check public records, MLS, etc. The assignment includes checking the accuracy of the calculations, the reasonableness of the data, and the appropriateness of the methodology. Would your answer be different if the reviewer is not asked to confirm data within the report itself, but the balance of the assignment is the same? The results of each are to be used as part of an internal quality control. 6 Residential Appraisal Review and USPAP Compliance, Student Manual

19 d. This assignment includes an inspection of at least the exterior of the subject property, as well as at least viewing the comparable properties from the street to confirm some of the data presented. This type of review may include research to gather additional data and confirmation of market data included in the report itself. D. Types of Appraisal Review Reports USPAP does not dictate the form, format, or style of Appraisal Review Reports. The substantive content of a report determines its compliance. STANDARD 3 addresses the content and level of information required in communicating the results of an appraisal review assignment. The type of appraisal review reports are generally dictated by the client, based on discussion with the appraiser. Most common report types include: 1. Form reports a. Fannie Mae 2000 (Freddie Mac 1032): One-Unit Residential Appraisal Field Review Report is the most commonly requested type of report for quality control and compliance for single-unit properties. b. Fannie Mae 2000A (Freddie Mac 1072): Two-to-Four Unit Residential Field Review Form is used for small residential income properties. c. Forms for other property types are more numerous and less standardized than residential forms. Some client groups have developed their own forms to meet their specific needs. d. Software providers offer a variety of residential and commercial review forms for various types of appraisal reviews. e. All forms should be checked for USPAP compliance and supplemented when necessary. 2. Checklists 3. Narrative reports a. Reviewer generally creates his or her own format, although there are some software providers who offer narrative report formats. b. Content must comply with appropriate USPAP Standards. c. Narrative reports must meet the needs of the client and any other intended users. Residential Appraisal Review and USPAP Compliance, Student Manual 7

20 4. Oral reports a. Used when client does not require a written report. Often used in court testimony or when a reviewer is being deposed. b. Reviewer must develop the appraisal review opinion prior to delivering the oral report. A reviewer should not be expected to provide an opinion about another appraiser s work on the spot. c. Reviewer must make sure the appraisal review has been properly developed and that a supporting workfile in compliance with USPAP is in place prior to issuing an oral report. 8 Residential Appraisal Review and USPAP Compliance, Student Manual

21 Section 1, Part 3. The USPAP Connection Your knowledge of how USPAP relates to both appraisal and appraisal review assignments is critical to your livelihood as an appraiser. This brief review of parts of USPAP will serve as a reminder of how USPAP compliance is used on a practical basis. You may want to use your copy of the USPAP publication as we move through the materials. The more appraisal reviews you complete, the more you will use the USPAP publication. A reviewer must have an in-depth understanding of his or her own obligations when completing appraisal review assignments. A practical, working knowledge is needed on how USPAP is the underlayment for both appraisal and appraisal review assignments. This section highlights certain parts of USPAP that will assist you as you complete appraisal review assignments. They will also prove beneficial if you have had your work reviewed and had questions about the process. I. Definitions A. Why does USPAP define certain terms? 1. There are numerous terms critical to value-related services. USPAP defines those terms that are essential to understanding the Uniform Standards. 2. USPAP definitions have distinct meanings in the context of their use within the USPAP document. a. For example, the term assignment has a specific meaning as applied in USPAP versus its common dictionary meaning. b. USPAP is the source authority for many unique terms used in the appraisal profession. Examples of such terms are extraordinary assumption and hypothetical condition. 3. USPAP defines the components of the term market value rather than providing an actual definition. a. There are a variety of market value definitions. b. USPAP does not endorse any specific definition of market value or source. Residential Appraisal Review and USPAP Compliance, Student Manual 9

22 c. Source could be a recognized authority, i.e., regulatory agency; a specific legal jurisdiction, i.e., bankruptcy court; a specific body of knowledge, i.e., real property; or customized and specific to the client s intended use and identified scope of work. B. What are key terms applicable in appraisal review work? 1. All the terms listed in the DEFINITIONS section are important to understanding USPAP, but we will concentrate on these key terms and definitions. 2. Of these terms, some are simple and similar to everyday use. Others are more complicated and/or USPAP specific. 3. Overview of key terms Appraisal Appraisal Practice Appraisal Review Appraiser Assignment Assignment Results Bias Credible Extraordinary Assumption Hypothetical Condition Intended Use Intended User Report Valuation Service Workfile C. Definitions and Illustrations (The key terms above are listed in alphabetical order. These terms will be addressed in a different order below.) 10 Residential Appraisal Review and USPAP Compliance, Student Manual

23 1. Valuation Services a. 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. b. Valuation services encompass a wide range of activities. It is not necessary for a service to include development of a value opinion for that service to be a valuation service. c. Examples of valuation services include: Property management Brokerage Appraisal Construction Other 2. Appraisal Practice a. Defined as: valuation services performed by an individual acting as an appraiser, including but not limited to appraisal and appraisal review. b. USPAP applies only to appraisal practice. c. When the service is performed by an individual acting in the role of an appraiser, it is appraisal practice. A client has expectation that the individual will act in the role of an appraiser. 3. Appraiser a. Defined as: one who is expected to perform valuation services competently and in a manner that is independent, impartial, and objective. Comment: Such expectation occurs when individuals, either by choice or by requirement placed upon them or upon the service they provide by law, regulation, or agreement with the client or intended users, represent that they comply. b. What does acting as an appraiser or performing a service as an appraiser mean? Representing oneself as an appraiser. An expectation of appraisal competence in the service being performed. Residential Appraisal Review and USPAP Compliance, Student Manual 11

24 An expectation that the service will be provided in a manner that is unbiased (see definition above). c. The expectation for an individual to act as an appraiser indicates an obligation to comply with USPAP to: Maintain public trust. Adhere to the definition of appraiser. Meet expectations of clients and other intended users when an appraiser is identified. d. What are the responsibilities of an appraiser regarding user expectations? Identify the capacity in which he or she is performing, and inquire about the intended users expectations. When performing services outside appraisal practice, individuals must not misrepresent themselves. An individual, when given the opportunity, can choose to provide a valuation service as an appraiser or in some other capacity, but must use great care not to violate public trust. 4. Appraisal a. Defined as: (noun) the act or process of developing an opinion of value; an opinion of value. (adjective) of or pertaining to appraising and related functions such as appraisal practice or appraisal services. Comment: An appraisal must be numerically expressed as a specific amount, as a range of numbers, or as a relationship (e.g., not more than, not less than) to a previous value opinion or numerical benchmark (e.g., assessed value, collateral value). b. The definition makes it clear that any opinion of value, regardless of how it is expressed, is an appraisal. It is not uncommon for appraisers to express an opinion of value as a point ($150,000), a range (between $147,000 and $155,000), or as a relationship (the value is at least what it was in the previous appraisal.) 5. Appraisal Review a. 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 or appraisal review assignment. 12 Residential Appraisal Review and USPAP Compliance, Student Manual

25 Comment: The subject of an appraisal review assignment may be all or part of a report, workfile, or combination of these. b. USPAP does not define or address any service, request, etc. that is simply called a review. USPAP defines and addresses appraisal review. While documents can be reviewed by anyone, an appraisal review can only be performed by an appraiser. c. A common misconception is that an appraisal review must include the reviewer s own opinion of value. By definition, an appraisal review does not include the reviewer s opinion of value. However, USPAP recognizes that very often clients request that the reviewer provide a value opinion. The scope of work for this type of assignment includes both an appraisal review and an appraisal. While it is acceptable to provide both the appraisal review opinion and the value opinion in the same report, the appraiser has additional requirements when performing such an assignment. We will be discussing these requirements in detail later when we discuss STANDARD Assignment a. Defined as: 1) An agreement between an appraiser and a client to provide a valuation service; 2) the valuation service that is provided as a consequence of such an agreement. b. The term assignment is used in two different contexts in USPAP: The appraiser must decide prior to accepting the assignment that he or she is competent to perform the assignment. In completing the assignment, the appraiser must take the steps necessary or appropriate to complete the assignment competently. 7. Assignment Results a. Defined as: An appraiser s opinions or conclusions developed specific to an assignment. Comment: Assignment results include an appraiser s: opinions or conclusions developed in an appraisal assignment, not limited to value; opinions or conclusions, developed in an appraisal review assignment, not limited to an opinion about the quality of another appraiser s work; opinions or conclusions developed when performing a valuation service other than an appraisal or appraisal review assignment. b. Assignment results are treated as confidential under the ETHICS RULE. Residential Appraisal Review and USPAP Compliance, Student Manual 13

26 From Your Perspective: Illustration 3 I am an appraiser and my practice includes requests to comment on a wide range of valuation work performed by others. At various times this work is presented as an appraisal report, appraisal review report, market data summary, or even as a broker s price opinion. When does STANDARD 3 apply? 8. Bias a. Defined as: A preference or inclination that precludes an appraiser s impartiality, independence, or objectivity in an assignment. b. Bias is specifically addressed in USPAP, including the Conduct section of the ETHICS RULE and in the SCOPE OF WORK RULE, as well as in the certification of STANDARDS 2, 3, 6, 8, and 10. c. Acting with bias contradicts the requirements defined for an appraiser. 9. Credible a. Defined as: worthy of belief. 14 Residential Appraisal Review and USPAP Compliance, Student Manual

27 Comment: Credible assignment results require support, by relevant evidence and logic, to the degree necessary for the intended use. b. Understanding the meaning of credible within USPAP is critical to the overall understanding of USPAP. One of the objectives in the development of USPAP Standards is that the appraiser must complete work necessary to achieve credible results. c. The Comment further qualifies worthiness by indicating that assignment results require support, by relevant evidence and logic, and that credibility is measured in terms of what is necessary for the intended use. d. The linking to intended use clarifies that what is credible based on the intended use in one assignment might not be in another assignment with a different intended use. 10. Extraordinary Assumption a. Defined as: An assumption, directly related to a specific assignment, as of the effective date of the assignment results, which, if found to be false, could alter the appraiser s opinion or conclusions. Comment: Extraordinary assumptions presume as fact otherwise uncertain information about physical, legal, or economic characteristics of the subject property; or about conditions external to the property, such as market conditions or trends; or about the integrity of data used in an analysis. b. An extraordinary assumption is used when the actual condition is uncertain, but there is a reasonable basis for such an assumption. For example, in an appraisal review, if the reviewer does not inspect the interior of the subject property, the reviewer might use an extraordinary assumption that the property improvements are as the report indicates. The use of the extraordinary assumption alerts the client and intended users to the uncertainty of the assignment result. 11. Hypothetical Condition a. Defined as: A condition, directly related to a specific assignment, which is contrary to what is known by the appraiser to exist on the effective date of the assignment results, but is used for the purpose of analysis. Comment: Hypothetical conditions are contrary to known facts about physical, legal, or economic characteristics of the subject property; or about conditions external to the property, such as market conditions or trends: or about the integrity of data used in an analysis. Residential Appraisal Review and USPAP Compliance, Student Manual 15

28 b. A hypothetical condition is sometimes used in the work under review and a reviewer must look to the validity of that use under USPAP. (Reference the Comment to SR 1-2(g)). From Your Perspective: Illustrations 4 and 5 4) What s important to know about measuring credible assignment results? 5) Must a hypothetical condition or extraordinary assumption be labeled? 16 Residential Appraisal Review and USPAP Compliance, Student Manual

29 11. Intended Use a. Defined as: The use or uses of an appraiser s reported appraisal or appraisal review assignment opinions and conclusions, as identified by the appraiser based on communication with the client at the time of the assignment. b. Intended use is the basis in establishing what is credible in an assignment. The appraiser must identify the intended use in order to properly define the appraisal problem to be solved. c. Intended use is a key factor in identifying other assignment elements, all of which are considered in determining the scope of work necessary in an assignment. 12. Intended User a. Defined as: the client and any other party as identified, by name or type, as users of the appraisal or appraisal review report by the appraiser on the basis of communication with the client at the time of the assignment. b. A report must contain sufficient information to allow the intended users to understand it properly. It is, therefore, necessary for an appraiser to know who the intended users are in an assignment. Residential Appraisal Review and USPAP Compliance, Student Manual 17

30 From Your Perspective: Illustration 6 In an appraisal review assignment that includes the reviewer s own opinion of value, is the reviewer required to use the same scope of work as the original appraiser? 13. Report a. Defined as: Any communication, written or oral, of an appraisal or appraisal review that is transmitted to the client upon completion of an assignment. Comment: Most reports are written and most clients mandate written reports. Oral report requirements (see RECORD KEEPING RULE) are included to cover court testimony and other oral communications of an appraisal or appraisal review. b. The report is the communication that conveys the assignment results to the client. Reports are often, mistakenly, referred to as appraisals. The client receives either an appraisal report or an appraisal review report. 18 Residential Appraisal Review and USPAP Compliance, Student Manual

31 14. Workfile a. Defined as: documentation necessary to support an appraiser s analyses, opinions, and conclusions. From Your Perspective: Illustration 7 I am a manager for an Appraisal Management Company that performs commercial and residential appraisals in various parts of the country. Our company acts as the agent for our clients who consist of numerous regional and national lenders. In that capacity, we take in appraisal orders from our clients and order those appraisals from fee appraisers on our approved list of appraisers. We also perform STANDARD 3 compliant reviews on those appraisals. We forward the appraisal and appraisal review reports to our clients. Are we required to keep a file of the appraisal reviews? Residential Appraisal Review and USPAP Compliance, Student Manual 19

32 II. The PREAMBLE A. Why should I be concerned about the PREAMBLE of USPAP? The PREAMBLE presents an overview of USPAP. The PREAMBLE: 1. establishes the purpose of USPAP to promote and maintain a high level of public trust in appraisal practice; 2. explains why standards exist, as well as who benefits from those standards; 3. provides an overview of the content of USPAP; and 4. addresses: a. who must comply with USPAP and b. what parts of USPAP apply to various assignments. B. The PREAMBLE states that USPAP addresses the ethical and performance obligations of appraisers through DEFINITIONS, Rules, Standards, Standards Rules, and Statements. C. A section on When Do USPAP Rules and Standards Apply is presented in the PREAMBLE, and serves as a checklist for appraisers and users of appraisal services. USPAP does not establish who or which assignments must comply. Neither The Appraisal Foundation nor its Appraisal Standards Board (ASB) is a government entity with the power to make, judge, or enforce law. An appraiser must comply with USPAP when either the service or the appraiser is required by law, regulation, or agreement with the client or intended user. Individuals may also choose to comply with USPAP any time that individual is performing the service as an appraiser. In order to comply with USPAP, an appraiser must meet the following obligations: An appraiser must act competently and in a manner that is independent, impartial, and objective. An appraiser must comply with the ETHICS RULE in all aspects of appraisal practice. An appraiser must maintain the data, information and analysis necessary to support his or her opinions for appraisal and appraisal review assignments in accordance with the RECORD KEEPING RULE. An appraiser must comply with the COMPETENCY RULE and the JURISDICTIONAL EXCEPTION RULE for all assignments. When an appraiser provides an opinion of value in an assignment, the appraiser must also comply with the SCOPE OF WORK RULE, the RECORD 20 Residential Appraisal Review and USPAP Compliance, Student Manual

33 KEEPING RULE, the applicable development and reporting Standards and applicable Statements. When an appraiser provides an opinion about the quality of another appraiser s work that was performed as part of an appraisal or appraisal review assignment, the appraiser must also comply with the SCOPE OF WORK RULE, the RECORD KEEPING RULE, applicable portions of STANDARD 3 and applicable Statements. When preparing an appraisal or appraisal review that is a component of a larger assignment with additional opinions, conclusions, or recommendations, the appraisal or appraisal review component must comply with the applicable development and reporting Standards and applicable Statements, and the remaining component of the assignment must comply with the ETHICS RULE, the COMPETENCY RULE, and the JURISDICTIONAL EXCEPTION RULE. III. The Rules A. How the Rules connect to Appraisal Review Assignments 1. USPAP contains five Rules. These rules apply to all disciplines and to various types of assignments within appraisal practice. In this section, we will review the key points of these rules and will provide some illustrations relevant to appraisal review assignments. You may want to reference your USPAP publication for specific sections and wording of the Rules. 2. The Rules are: ETHICS RULE RECORD KEEPING RULE COMPETENCY RULE SCOPE OF WORK RULE JURISDICTIONAL EXCEPTION RULE B. The ETHICS RULE 1. The ETHICS RULE addresses the behavior of appraisers in general, reinforcing our responsibilities as appraisers. An appraiser must always perform in a manner that is independent, impartial, and objective. This is a fundamental concept in USPAP. Residential Appraisal Review and USPAP Compliance, Student Manual 21

34 2. Key points of the ETHICS RULE include: a. Although appraisers must often apply judgment in their analysis, the judgment and resulting opinions and conclusions must be based on fact (objective), not subjective (based on feeling or perception.) b. Advocacy is NOT allowed in appraisal practice. In appraisal review assignments, the reviewer s role is to form an opinion of the work under review, including a value opinion if it is part of the scope of work. The appraiser must not be an advocate for either the client or the appraiser whose work is under review. The reviewer s conclusions should be the same regardless of who was responsible for engaging his or her service. c. The appraiser must disclose any present or prospective interest in the property or in the parties to any transaction prior to accepting an assignment. In addition to the initial disclosure, the certification (required in every appraisal or appraisal review report) must state whether there is such an interest. If there is, that interest must also be stated in the certification. d. Prior to accepting an assignment, the appraiser must disclose any services regarding the subject property that he or she performed in the three years prior to accepting the assignment. In addition to the initial disclosure, the appraiser s certification must state whether the appraiser provided any such services, and if so, what those services were. The appraiser is not required or allowed (without authorization from prior client) to disclose the results of any prior service. Remember, the prior services regarding the subject property are not limited to appraisal practice. e. Disclosure is required if an appraiser pays a fee, commission, or gives anything of value in connection with the procurement of an assignment. f. USPAP lists several unacceptable compensation arrangements. The Management section of the ETHICS RULE states: An appraiser must not accept an assignment, or have a compensation arrangement for an assignment, that is contingent on any of the following: The reporting of a predetermined result (e.g., opinion of value); A direction in assignment results that favors the cause of the client; The amount of a value opinion; The attainment of a stipulated result (e.g., that the loan closes, or taxes are reduced); or 22 Residential Appraisal Review and USPAP Compliance, Student Manual

35 The occurrence of a subsequent event directly related to the appraiser s opinions and specific to the assignment s purpose. The commonality in these arrangements is that any of them could effectively reward bad behavior. g. The Confidentiality section of the ETHICS RULE states: An appraiser must not disclose: (1) confidential information; or (2) assignment results to anyone other than: the client; parties specifically authorized by the client; state appraiser regulatory agencies; third parties as may be authorized by due process of law; or a duly authorized professional peer review committee except when such disclosure to a committee would violate applicable law or regulation. Residential Appraisal Review and USPAP Compliance, Student Manual 23

36 From Your Perspective: Illustration 8 A few weeks ago I performed an appraisal for a lender client. I was recently contacted by an individual who claims that she is a review appraiser that has been hired by the lender, and wanted to ask me some questions about my appraisal. Can I discuss my appraisal with her? 24 Residential Appraisal Review and USPAP Compliance, Student Manual

37 C. The COMPETENCY RULE 1. The COMPETENCY RULE states in part: An appraiser must (1) be competent to perform the assignment; (2) acquire the necessary competency to perform the assignment; or (3) decline or withdraw from the assignment. In all cases, the appraiser must perform competently when completing the assignment. 2. Competency may apply to any of several factors such as (but not limited to): property type a property s submarket geographic area intended use applicable laws and regulations analytical methods 3. If an appraiser lacks the knowledge or experience to complete an assignment competently, he or she may still accept the assignment under certain conditions. In order to accept the assignment the appraiser must: disclose the lack of knowledge and/or experience before accepting the assignment; take the steps necessary to become competent; and disclose in the report the initial lack of knowledge and/or experience and the steps taken to perform competently. An appraiser may become competent by working with another appraiser who has the necessary knowledge and experience, taking a course, reading articles, or performing appropriate market research. 4. If factors or conditions come up during an assignment that lead an appraiser to realize that he or she lacks the necessary knowledge or experience, he or she must contact the client and comply with the same requirements listed above. Residential Appraisal Review and USPAP Compliance, Student Manual 25

38 From Your Perspective: Illustration 9 I have a client who has asked me to perform a desk review on an appraisal report for a property located in a different state. I have no knowledge of the real estate market in that state and have never even stepped foot there. Can I perform a USPAP-compliant appraisal review on this report? 26 Residential Appraisal Review and USPAP Compliance, Student Manual

39 D. The SCOPE OF WORK RULE 1. Problem Identification section: The appraiser must identify the problem to be solved in each appraisal or appraisal review assignment. Problem identification actually consists of the identification of several of the various assignment elements. The elements are: Client and any other intended users; Intended use of the appraiser s opinions and conclusions; Type and definition of value; Effective date of the appraiser s opinions and conclusions; Subject of the assignment and its relevant characteristics; and Assignment conditions. a. Most of these assignment elements are established based on communication with the client (communication may sometimes occur through an agent of the client). The identification of the relevant characteristics, however, is a judgment made by the appraiser. b. Assignment conditions include assumptions, extraordinary assumptions, hypothetical conditions, applicable laws and regulations, jurisdictional exceptions, and other conditions that affect the scope of work. c. The appraiser must disclose any present or prospective interest in the property or in the parties to any transaction prior to accepting an assignment. In addition to the initial disclosure, the certification (required in every appraisal or appraisal review report) must state whether there is such an interest. If there is, that interest must also be stated in the certification. 2. Scope of Work Acceptability section: a. The Scope of Work Acceptability section says that in order to be deemed acceptable, the scope of work in an assignment must meet or exceed two thresholds. These are: the expectations of parties who are regularly intended users for similar assignments; and what an appraiser s peers actions would be in performing the same or a similar assignment. Residential Appraisal Review and USPAP Compliance, Student Manual 27

40 b. It is the appraiser s responsibility to determine an acceptable scope of work. If client instructions or other conditions limit the scope of work to a point the assignment results will not be credible, the appraiser must either modify the assignment conditions to expand the scope of work or use an extraordinary assumption. Use of an extraordinary assumption is only an option if credible assignment results can be developed. The appraiser must withdraw from the assignment if he or she is unable to modify the assignment conditions or use an extraordinary assumption. 3. Disclosure Obligations section: a. The Disclosure Obligations state: The report must contain sufficient information to allow intended users to understand the scope of work performed. Comment: Proper disclosure is required because clients and other intended users rely on the assignment results. Sufficient information includes disclosure of research and analyses performed and might also include disclosure of research and analysis not performed. b. USPAP requires that the appraiser disclose sufficient information so the client and any other intended users understand what research and analysis the appraiser performed in the assignment. If necessary for intended users understanding, the appraiser may also need to disclose research and analysis not performed. 28 Residential Appraisal Review and USPAP Compliance, Student Manual

41 From Your Perspective: Illustration 10 If a reviewer concludes that an appraisal report is unacceptable, does the reviewer need to cite specific requirements in USPAP that were not fulfilled appropriately? We will revisit scope of work issues during our discussion of STANDARD 3. E. The RECORD KEEPING RULE 1. A workfile must be prepared for each appraisal or appraisal review assignment. 2. A workfile must exist prior to the issuance of any report. 3. A written summary of an oral report must be added to the workfile within a reasonable time after the issuance of an oral report. 4. The workfile must include: Name of the client and identity (by name or type) of any intended users; True copy of all written reports; All other data, information, and documentation (or references to their location) required to support the appraiser s opinions and conclusions, and to show compliance with USPAP; and If a Restricted Appraisal Report is transmitted, the workfile must contain sufficient information for an appraiser to produce an Appraisal Report. Residential Appraisal Review and USPAP Compliance, Student Manual 29

42 5. The workfile for an oral report must also include a summary of the oral report and a signed and dated certification. 6. Workfile must be retained for at least five years, or if the appraiser provides testimony related to an assignment the workfile must also be retained for at least two years beyond the final disposition, whichever period expires last. From Your Perspective: Illustration 11 If two appraisers sign an appraisal report, what are the obligations related to record keeping? Specifically, must both appraisers keep a copy of the workfile? F. The JURISDICTIONAL EXCEPTION RULE 1. The JURISDICTIONAL EXCEPTION RULE is essentially a severance clause for USPAP. It states that in those instances when a law or regulation precludes an appraiser from complying with a part or parts of USPAP, the rest of USPAP is still in effect. 2. In an assignment involving a jurisdictional exception, an appraiser must: 30 Residential Appraisal Review and USPAP Compliance, Student Manual

43 identify the law or regulation that precludes compliance with USPAP; comply with that law or regulation; clearly and conspicuously disclose in the report the part of USPAP that is voided by that law or regulation; and cite in the report the law or regulation requiring this exception to USPAP compliance. IV. STANDARD 3, Appraisal Review, Development and Reporting A. USPAP states: 1. In developing an appraisal review assignment, an appraiser acting as a reviewer 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 review. In reporting the results of an appraisal review assignment, an appraiser acting as a reviewer must communicate each analysis, opinion, and conclusion in a manner that is not misleading. 2. STANDARD 3 applies to both the development and reporting in appraisal review assignments. Standards Rules 3-1 through 3-3 address development requirements and Standards Rules 3-4 through 3-7 address reporting. Many of the requirements generally mirror those of STANDARDS 1 and 2. Review of these standards in addition to STANDARD 3 is helpful when conducting appraisal review assignments. 3. The term reviewer in this Standard is used to refer to an appraiser performing an appraisal review. B. Standards Rule 3-1 (closely mirrors Standards Rule 1-1 except it applies to appraisal review rather than real property appraisal.) 1. Elaborates on the requirements in the COMPETENCY RULE. 2. Addresses the obligations of the reviewer: a. Be aware of, understand and correctly employ recognized methods and techniques. b. Do not commit substantial errors of omission or commission. c. Do not provide services in a careless or negligent manner. C. SR 3-2 identifies the assignment elements necessary to define the problem and ends with determining the scope of work necessary to produce credible assignment results. Residential Appraisal Review and USPAP Compliance, Student Manual 31