Appraisers are required to perform their duties in accordance with the Uniform Standards of Professional Appraisal Practice (“USPAP”).
The Preamble of USPAP establishes that it is an appraiser’s responsibility “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.” Interestingly, the appraisers are the only group of licensed professionals regulated by the Division of Real Estate that actually have ethical obligations incorporated into their practice standards. USPAP further requires an appraiser to “act competently and in a manner that is independent, impartial, and objective.” One of the most common misconceptions that I see from real estate brokers is that somehow the appraiser is supposed to advocate for the contract price. That is not an appraiser’s role. In a typical real estate purchase transaction, an appraiser is usually engaged by a lending institution to provide an opinion of value on real property so that the lending institution can make an informed decision on whether or not to lend money for the acquisition of the property. The appraiser will support the opinion of value with market data pertinent to one of the three approaches to value defined in USPAP: Sales Comparison, Cost, and Income approaches. The Sales Comparison approach is the most utilized and recognizable valuation method. Market value is determined by comparing the property to comparable sales of properties that would likely experience similar market experiences. For typical residential properties, defining market areas of influence or neighborhoods will result in the selection of comparable sales that experience similar market influences. However, if the subject property being valued is atypical of properties in a particular locale, additional analysis may be required to find suitable comparable sales experiencing similar marketability. The cost approach looks at only the subject property being valued. Market value is determined by estimating the price of land acquisition, the cost of building a suitable replacement in the same market area, and depreciating that cost new based on the age of the property being valued. Typically, this approach is best used for new construction where accrued depreciation is minimal and the appraiser is able to acquire actual construction costs from builders in the market area. The income approach is typically utilized for rental or income-producing properties, especially in areas where the return on investment is influencing the marketability of the property being valued. Market value is determined by capitalizing market rents or income at a comparable rate of return. If the property being valued is a rental property and potential market participants are looking for a return on an investment, the income approach may be the best indicator of a property’s marketability. All of which should be detailed in the appraisal report and supported in the appraiser’s work file. USPAP requires the appraiser to consider all three approaches to value and if any of the three approaches are not considered in determining market value, an explanation of its omission is required.
The Board of Appraisers Role
If someone is upset with only the appraiser’s opinion of value, they will have no recourse with the Board. The Board does not regulate value conclusions, but rather the methodology and practice standards involved in arriving at an opinion of value. For example, an appraisal is done of a property in Pueblo and the appraiser used comparable properties from Vail and Boulder. The Vail and Boulder real estate markets are very dissimilar from Pueblo’s real estate market and the resulting value conclusion would not be credible. If a complaint was filed with the Board about the comparable properties used, inaccurate cost data, or a failure to consider income potential, the Board would investigate the complaint. Another example of a complaint the Board would investigate is an appraiser who is unfamiliar with a geographic area and performs an appraisal without familiarizing himself or herself with the market. An appraiser who regularly practices in the Fort Collins market cannot appraise in Aspen without first learning the Aspen market and being able to access Aspen market data.
While it may be extremely frustrating when an appraisal comes in below the contract price, I would caution real estate brokers and mortgage loan originators regarding how they interact with the appraiser. While you can request that the appraiser consider additional, appropriate information, ask that errors be corrected, or provide additional information for consideration, there is a federal law that makes it unlawful to engage in any act or practice that violates appraisal independence in a transaction that involves the extension of credit for a consumer credit transaction secured by the principal dwelling of the consumer. It is a violation of federal law for anyone with an interest in the underlying transaction to compensate, coerce, extort, collude, instruct, induce, bribe, or intimidate a person, appraisal management company, firm, or other entity conducting or involved in an appraisal for the purpose of causing the appraised value to be based on anything other than the independent judgment of the appraiser. Attempts to perform any of the aforementioned acts are also unlawful. It is also unlawful to: mischaracterize the appraised value of the property securing the extension of credit; seek to influence an appraiser or otherwise to encourage a targeted value in order to facilitate the making or pricing of the transaction; withhold or threaten to withhold timely payment for an appraisal report or for appraisal services rendered when the appraisal report or services are provided for in accordance with the contract between the parties. If the Division received a complaint that one of our licensees was violating the Appraiser Independence Requirements, we would conduct an investigation. If substantiated, the respective Board or Commission could discipline the professional license. So, be nice to the appraisers.