The real estate appraisal process is based on considering three approaches to value when providing an opinion of value for a specific portion of real estate. Cost, Income, and Sales Comparison. Yet, what is consideration without verification that an approach was indeed considered and deemed viable or not in the final conclusion of value?
Here's the fundamental question:
"Do the principles of our profession, regardless of USPAP, allow us to totally dismiss the income and cost approach without verification that the conclusion made by the appraiser can be substantiated?"
Let’s review USPAP
Standard Rule 1-4 In developing a real property appraisal, an appraiser must collect, verify, and analyze all information necessary for credible assignment results.
(b) When the cost approach is necessary for a credible assignment results, an appraiser must: etc.
(c) When the income approach is necessary for a credible assignment results, an appraiser must: etc.
Standard Rule 1-2(f) states “identify the scope of work necessary to complete the assignment;
Comment: The scope of work is acceptable when it is consistent with:
- The expectations of the participants in the market for the same or similar appraisal services; and
- What the appraiser’s peers’ action would be in performing the same or a similar assignment in compliance with USPAP.
It continues to say:
An appraiser must have sound reasons in support of the scope of work decisions and must be prepared to support the decision to exclude any information or procedure that would appear relevant to the client, an intended user, or the appraiser’s peers in the same or a similar assignment.
An appraiser must not allow assignment conditions or other factors to limit the extent of research or analysis to such a degree that the resulting opinion and conclusions developed in an assignment are not credible in the context of the intended use of the appraisal.
Does USPAP allow us to make the statement that an approach to value is not applicable without any substantiation?
Which brings rise to another question: What is in your file memorandum? Do we need to have support that substantiates that an approach is not applicable?
I believe that part of the problem with appraisals that misrepresent the fair market value is in part due to the appraiser not utilizing three approaches to value to insure there are checks and balances to support the final conclusion.
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dLet me first say, I don’t play politics very well. If I did maybe I would be a real estate agent and not an appraiser. Let me also say that I like to intelligent conversations, which seems to become more and more difficult in this line of work. Not that this forum is a reflection of the general consensus of appraisers.
About 20 years ago, after taking several courses, I came to the theory that the income approach and cost approach were not applicable. That GRM were not available and if I did find them they would be very inconsistent. I also believed that effective age was arbitrary and could not be supported.
Setting out on a quest, I spent months extracting GRM data, putting a clerical person on the task for weeks collecting rental and GRM data. Then putting the results on graph paper (there was no excel at that time) we found that there was consistency, and when utilizing the information, the income approach, this simple ratio analysis gave support to the value conclusions made in other approaches.
We did the same in determining if the cost program we were using was a fair reflection of cost in the area, started obtaining site value contribution through extractions and allocation methods. We then started to develop economic lives and effective ages from sales in the area. Again, my theory was proven wrong, that in fact the principles of my profession were well founded and conclusions could be substantiated.
No it’s not an exact science, but it’s not as arbitrary as some think it is.
While I have never given up my extractions and confirmation of the cost analysis, I have given up the income approach until recently. As more buyers are kept from the market, some by choice and some by changes in the banking regulations, I have started to collect GRM and rental data again.
Again, I find data and again consistency is starting to emerge within a couple of weeks.
USPAP states when an approach is necessary for a credible assignment results an appraiser must: etc. It used to say, when the approach was applicable, an appraiser must: etc.
Not sure why this has happen, quite frankly I think it is bull!
I believe the principles of our profession are given such a distinction, because they are almost always applicable and hence always necessary for a credible assignment results.
I am sure that the next USPAP edition will decide something else, something with less substance, lower expectations of the appraiser, and more consistent with what the lender desires.
I ask other professional appraisers not to lose sight of these principles,
- That the data should be constantly collected,
- that Excel spread sheets be developed for these approach as much and as often as the sales approach and trend analysis you are giving so much time to,
- that we recognize these approaches to value and while not always given the greatest weight in the final reconciliation, they do provide the checks and balances necessary for a credible appraisal report.
Now more than ever, our credibility and our integrity are in question. To earn it back I ask other professionals (especially designated and certified general and residential appraisers) to present the information in the appraisal report, since peer action determines scope. If the leaders of our industry don’t present this information in the report, then how will other peers know that the expectations are higher than what they have been providing?
Do we need to substantiate our conclusions?
How do you present your analysis to your clients when it extends beyond the confines of the URAR?
Author: Jeff Patterson, owner of Residential Appraisals - Has been providing residential appraisals for most of southern and central Maine for the past 25 years. Jeff's clients range from private appraisals to working with brokers, banks, litigation support and expert court testimony.
477 Mouse Lane
Alfred, ME 04002
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