What Makes an Appraisal Worthy of Belief?

USPAP!

What is USPAP? USPAP is an acronym for the Uniform Standards of Professional Appraisal Practice which establish minimum requirements for personal property, real property and intangible asset appraisers performing a valuation service. When appraisers comply with USPAP the client and intended users have a reason to put their faith in the personal property appraiser's opinions, analyses and conclusions and to believe that the appraisal is worthy of belief.

An appraisal is an objective, impartial and unbiased opinion of defined value completed by a competent, ethical and qualified appraiser. It requires an understanding of the client's appraisal problem, an identification of the property type, its value-relevant characteristics, and an analysis of equivalent objects that were offered or sold in the relevant market. Appraisal reports must be USPAP compliant, meaningful to the client and intended users, relevant to intended use and not misleading.

Appraisers Must Identify the Problem

There are several elements of the client's appraisal problem that must be properly understood by the appraiser before the appraiser can proceed. This first step in the appraisal process is called problem identification, and is the most important challenge the appraiser faces in every appraisal assignment. STANDARD RULE 7-2 of USPAP establishes the elements and requirements of problem identification.

The elements that must be identified include intended use, intended user(s), the effective date, the type and definition of value, the relevant property characteristics and assignment conditions. Of these six assignment elements intended use is by far the most important to discuss carefully with the client. Proper problem Identification is necessary to determine whether the appraiser is competent to complete the assignment credibly, and then determine the scope of work that will be necessary to solve the client's appraisal problem credibly.

Assignment conditions include assumptions, hypothetical conditions and limiting conditions. In 2008 Novotny published a focused USPAP article in the Journal of Advanced Appraisal Studies entitled "Equivalent Sampling: the Valuation of Loss Claims with Limited Property Descriptions."

The Value Definition Determines the Relevant Market

The appraiser's choice of the value definition and the market level to investigate must be relevant to intended use and other assignment conditions. The value definition that is most relevant to intended use must by identified by the appraiser. Only then can the appraiser identify the relevant market or market level to research.

For instance, a "market value" type of definition, such as fair market value, has conditions that impact the determination of the relevant market, and that establish the conditions for a "market perspective." A replacement value focus is established by the terms of an insurance policy which focus on property replacement and cost rather than a pure market perspective mechanism. The appraiser must establish the applicable value definition and fulfill the conditions and requirements that apply to the chosen definition. These decisions are guided by how the client will use the appraisal (intended use).

Appraisers Must be Competent

Appraisers must comply with the COMPETENCY RULE of USPAP. The appraiser must be competent to identify the appraisal problem. The appraiser must be sufficiently familiar with the personal property type, relevant markets, geographic factors and the necessary analytical methods in order to develop credible assignment results and to complete the assignment competently.

The appraiser cannot accept an appraisal assignment (determine competency) until they properly understand (i.e. have identified) the appraisal problem; only then can the appraiser determine the scope of work (value approach, methods etc) required to develop credible assignment results relevant to intended use.

Personal property objects include a truly large universe of objects. Some objects require the knowledge and experience of a specialist. Novotny has a network of qualified specialists willing to share their valuable knowledge. Consultation is frequently necessary. Appraisal consultation provides evidence of diligent fact gathering which supports the appraisers opinions, analysis and conclusions. In 2011 Novotny published an article in the Journal of Advanced Appraisal Studies entitled: "When Does USPAP Require a Competency Disclosure?"

Mistakes in the appraisal process can be costly. For example a very rare Pennsylvania redware heart-shaped inkstand, that was signed and slip decorated with hearts, sold to a dealer for $28,750.00 at a Crocker Farm Auction which specializes in early American pottery. One month earlier this inkstand sold as part of a tray-lot for $14 at small York County Pennsylvania auction (Maine Antiques Digest, May 2011 page 29C).

An appraiser could find such an object in any residential contents appraisal. The appraiser must be competent enough to recognize the object as early redware. If lacking the knowledge and experience to appraise such an object credibly the appraiser must disclose the lack of competency to the client. If sufficiently familiar with such objects the appraiser should be diligent, and, through research and expert consultation, identify and research the relevant market (such as the Crocker Farm Auction) that informed sellers would choose in order to realize it's highest value.

In the same issue and section of Maine Antique Digest there are numerous examples of properties that sold recently at auction for substantially less, often half of what they sold for two or more years previously. Market conditions change. Recent economic conditions profoundly impact markets. Some property types continue to appreciate (eg Russian and Chinese objects) while other types of objects (eg dark brown antique furniture) have experienced decreased demand and falling prices. Appraisers must be aware of relevant economic conditions so that their analyses and opinions are credible. They must exercise persistent diligence to ensure that their assignment results are credible.

Novotny has thirty years of full-time, market based valuation experience and background with most personal property types and assignment types (intended uses). He reviews current published market indicators for most property types and market levels on a nearly daily basis.

Appraisers Must Determine the Scope of Work

No one benefits from too much or too little research and analysis—too little causes unreliable opinions, while too much wastes time and incurs needless expense. The personal property appraiser must do the type and amount of work necessary to develop credible answers to the personal property appraisal problem posed by a client. The personal property appraiser must properly understand the valuation problem and do whatever is necessary to solve the problem credibly.

The SCOPE OF WORK RULE of USPAP applies to:

the extent to which the property is identified;

the extent to which tangible property is inspected;

the type and extent of data research and analyses

The scope of work actually performed must be sufficient to develop credible assignment results. The appraiser must have the knowledge and experience to identify the valuation problem, and to determine the scope of work, prior at accepting an assignment and then must do whatever is necessary to develop credible opinions, analyses and conclusions.

Appraisers Must be Ethical

The appraiser must always remain independent, objective, impartial and unbiased throughout the appraisal assignment. They must not misrepresent their role. An appraiser must not advocate for a client or intended user.

The disclosure requirements of USPAP are important for public trust in appraisers. The appraiser must disclose any past, present or prospective interest in a party or subject property, and any payments to procure an appraisal assignment. Disclosure must be made to the client and in the report. An appraiser cannot accept an assignment with an unethical fee contingency (there are five such contingencies). An appraiser must protect the confidential nature of the appraiser-client relationship. An appraiser must establish and maintain a work file for each appraisal assignment.

A failure to comply with the ETHIC RULE of USPAP is a very serious violation which would likely undermine the credibility and reliability of the appraisal report. All appraisers, whenever acting as an appraiser, at all times must comply with the ETHICS RULE.

Appraisers Must Properly Develop Assignment Results

All appraisers follow the appraisal process in order to properly develop a credible answer to the appraisal problem.. STANDARD 7 follows the appraisal process. STANDARD 7 requires that:

The appraiser must know what to do, do it right and not be sloppy (SR 7-1)
identify the appraisal problem to be solved (7-2 a-g)
determine the scope of work (7-2h)
define and analyze the appropriate market (7-3)
collect, verify, and analyze all information necessary (7-4)
when a market value opinion - analyze current offers, listings or sales agreements and past sales of the subject property (7-5)
reconcile the quality and quantity of data available and analyzed within the approach(es) to value used, and reconcile the applicability and relevance of the approaches, methods and techniques used to arrive at the value conclusion(s) (7-6)

Appraisers Must Properly Report Assignment Results

Compliance with STANDARD 8 of USPAP will provide a basis for the client to determine that the report is complete and properly communicates the appraiser's scope of work. Appraisal reports must be meaningful, not misleading and relevant to intended use. Reported assignment results must be worthy of belief and reported in such a manner that the assignment results can be properly understood. The appraiser must properly disclose assignment conditions so clients can evaluate the extent of reliance to invest in the appraiser's report. Assignment results must answer the client's value question.

Compliance with STANDARD 7 and 8 of USPAP, as well as all applicable USPAP rules, such as the ETHICS RULE, must be stated, signed and certified in the appraisal report's appraiser's certification statement (USPAP SR 8-3).

Appraisers Must have Confidence in their Opinions

USPAP is not an afterthought - it applies from the moment of initial client contact.

Appraisers must comply with USPAP throughout the appraisal assignment. Before finishing up an assignment an appraiser must ask him or herself:

Did I properly "identify the valuation problem"?
Does my report properly answer the questions that were posed by the client?
Are my personal property appraisal opinions worthy of belief?
Is my report meaningful, not misleading, relevant to intended use, complete and properly communicated?

Whenever an appraiser accepts and completes a personal property appraisal assignment the answer to these questions should always be "YES!" Novotny will comply with USPAP, as well as the ISA Code of Ethics and Professional Conduct, and the ISA Report Writing Standard in all appraisal assignments.

In 2002 Novotny was certified (#10138) as an AQB Certified USPAP Instructor of the Uniform Standards of Professional Appraisal Practice (USPAP) by the Appraiser Qualification Board (AQB) of the Appraisal Foundation. He was the first personal property appraiser to attain this certification. He has remained current with his AQB Certification by recertifying for each new USPAP publication cycle including 2012 - 2013.

The Uniform Standards of Professional Appraisal Practice (USPAP)

Novotny has taught the Appraisal Foundations's USPAP courses yearly since 1998, and as an AQB Certified USPAP Instructor since 2003. He has taught these courses for ASA regional Chapters, the International Society of Appraisers (ISA), the Appraisers National Association (ANA), Appraisal Course Associates (ACA) and the College For Appraisers (CFA). He has presented USPAP classes in Los Angeles, San Diego, Sacramento, Dallas, Baltimore, Lincoln and Chicago.

USPAP Appraisal Review (USPAP, STANDARD 3)

Appraisers should comply with USPAP, a minimum standard, as well as the standards of their professional society. If their work is faulty, as can happen, the appraiser should be held accountable. The public has a right to expect ethical and competent performance. Find out more.

Personal Property USPAP Courses: Online and Onsite

In 2010 Novotny authored and published three Online USPAP Update Courses for personal property appraisers in conjunction with Dave Maloney, his partner at Appraisal Course Associates (ACA). The appraiser must be informed of current USPAP requirements in order to comply with those requirements.The ACA USPAP Update courses are convenient, cost effective and convey the most current requirements and advanced issues relevant to appraisal practice.

Appraisal Course Associates offers online and on-site USPAP Courses. Register Now

Contact Novotny now to have your valuation or appraisal review problem solved or to have Novotny conduct a USPAP 15 Hours USPAP Course or a 7 Hour USPAP Update Course.