New practice areas for appraisers: On the edge. - by Bill Pastuszek

October 13, 2017 - Appraisal & Consulting
Bill Pastuszek
Shepherd Associates

Appraisers are like old football players; they are running hard to keep up with ever-faster players. With the arrival of truly BIG DATA, and the seeming movement towards alternative valuations, it seems like the appraisal industry is in a bit of a free fall. Once again, appraisers aren’t in control of the mechanics of their profession and others are imposing their requirements on a business that resists change.

Appraisers are looking to expand from traditional practice areas like mortgage lending to new, and less familiar, practice areas. When an appraiser steps outside of the familiar, Intended Use guidelines, more than ever, achieve a high level of importance. The concept is central to both reporting and development in USPAP. Pertinent and useful concepts follow. 

Intended Use is the use or uses of an appraiser’s reported appraisal assignment opinions and conclusions, as identified by the appraiser based on communication with the client at the time of the assignment.  An intended user is the client and any other party, identified by the appraiser, as users of the appraisal on the basis of communication with the client at the time of the assignment. The client is the party or parties that engages the appraiser. 

Competency. Understanding the requirements of intended use is fundamental to establishing appraiser competency. Revisions to the Competency Rule several years ago by the Appraisal Standards Board noted that knowledge of the requirements of an intended use is an aspect of competency.

Scope of Work. The decision-making involved in scope of work determination, with its significant flexibility and awesome responsibility, reinforces the centrality of intended use. A specific link is created between intended use and the credibility of assignment results. In other words, the determinations made at the start of an assignment, and refined during the course of the assignment, must align with the requirements of the intended use. There is no one size fits all. 

Reporting. The requirements of intended users create different reporting requirements in various practice areas and for different intended uses. Appraisers specializing in one practice area and used to producing good quality reports for a specific intended use may be unaware of typical practice and reporting requirements related to other intended uses. 

Standard 2 relates the appropriate level of detail of an appraisal report with the requirements of the intended use and the intended user. Providing something less or different than what is required by the intended use may fail to meet the requirements of the intended use and result in violating USPAP. Appraisers are not unaware that clients often try to drive reporting (and development) to get appraisal results that avoid, circumvent, or ignore intended use requirements.

Assignment Results. Not providing assignment results consistent with an appropriate scope of work may result in loss of credibility, rejection of reports, or worse. Appraisers moving into  new, different practice areas must develop appropriate competency to meet the requirements of that intended use.

In the real world, this can lay out in different ways. Here are some examples.

Take something as simple as dates. An appraisal for financing typically has a current effective date. Some appraisals for financing may require a prospective valuation date to reflect an event (construction, rent up) that won’t occur until certain things occur. That prospective value requires an extraordinary assumption consistent with USPAP requirements to reflect the uncertainty of this future event.

Retrospective Appraisals. Many appraisals done for legal matters require specific, often retrospective, effective dates. With these types of assignments – eminent domain, easement donations, tax abatements, estate work – there are specific requirements for the relationship of key dates and for different market value definitions. Understanding how to research market conditions that apply as of a retrospective date and getting data relevant to that retrospective and being able to be in the mindset of that retrospective date are skills that are not always easily or quickly learned.

Unacceptable Results. Some users will try to manipulate assignments in order to circumvent or impair necessary elements of intended use requirements. Even experienced appraisers can be led astray in these situations. A solid knowledge of intended use requirements is necessary in order to be competent and produce credible assignment results, especially when venturing into unfamiliar or new practice areas, so as not to provide a misleading report.

Current Environment. As the lending environment continues to shift, appraisers increasingly are looking for different avenues in which to exercise their expertise. Change is constant and change, not properly recognized and dealt with, cannot only be unsettling but can cause otherwise perfectly competent appraisers to do the wrong thing.

USPAP 2018 introduces some further changes into the standards of the profession. My recommendation is to read and study it carefully. 

Don’t be like the character in Tom Petty’s song, “I’m free, free falling.” That’s not a good way to deal with the current state of the business, even though it sometimes feels like that is what is going on. 

Bill Pastuszek, MAI, ASA, MRA, heads Shepherd Associates, Newton, Mass.

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