Ground Up

Changes to the 2012-13 Uniform Standards of Professional Appraisal Practice

2011-08-12T22:31:00.000-07:00

It’s nearing the end of the two-year USPAP cycle and appraisers are seeking out information about what changes will take effect on January 1^st. To ensure compliance with USPAP, appraisers may have to update any boilerplate language that references something that changed, but more importantly, appraisers will need to truly understand and internalize the changes. The following is a summary of the changes indicated by the 2011 Summary of Actions Related to Proposed USPAP Changes published April 8, 2011 by the Appraisal Standards Board of The Appraisal Foundation. The full 39 page document can be downloaded and read at https://appraisalfoundation.sharefile.com/d/sd470eea561f412ab. In addition, a 23-minute webinar has been prepared by The Appraisal Foundation that discusses the changes and it can be viewed at http://www.globalpres.com/mediasite/Viewer/?peid=ae8192ef41804f23a498bf7b30458189.

• The Definitions section of USPAP includes definitions of terms that are unique to the appraisal profession. When a term is also defined in the dictionary, an individual should always use the USPAP definition when they represent that they are an appraiser or acting in the capacity of an appraiser.

o The definition of the term “Client” has been revised for clarity to ensure that the appraiser understands that communication is essential with one’s client for proper development of an appraisal problem. Interpretation of certain assignment conditions such as the HVCC made it seem as if the appraiser could not communicate with the client. However, such communication is critical.

o The definitions of the terms “Extraordinary Assumption” and “Hypothetical Condition” have also been revised for clarity by providing the concept of the effective date in each definition. A hypothetical condition is one that is false, but supposed to be true by the appraiser to solve the appraisal problem. On the other hand, an extraordinary assumption is something that appraiser does not know whether it is true or false, but is supposed to be true (or false) to solve the appraisal problem. The appraiser must have a reasonable basis to believe one way or another. For example, an appraiser encounters a room addition that appears to have been done in a workmanship-like manner. The property owner says the permits were pulled while the City Building Department does not have all the permits in the file. The appraiser can use an extraordinary assumption that the room addition is permitted and value the property as such. The appraiser must also conspicuously disclose the fact, and the fact that if found to be false, it would alter the valuation conclusion. On the other hand, if the owner says the room was added without permits, and if the appraisal purpose is to determine the value of the property if it were permitted, the appraiser can use a hypothetical condition to value the room as if it were permitted, even though it is false. The fact that it is false but analyzed as true must be clearly and conspicuously stated. The concept of the effective date enhances the condition as of the date of value.

o A new definition for “Exposure Time” has been added to the Definitions section. The concept of Exposure Time is not new to USPAP and has been required as part of development of an appraisal for market value in Standards 1, 7, and 9. However, because of misunderstanding of the importance of the concept (and too many appraisers not including it in their appraisal analysis because it is one of those things that do not show up on pre-printed form appraisals), it is now included in the Definitions and it’s use will be heightened in Standards 1 and 2 when it is a component of any value opinion (not just market value). Additional information explaining the differences between exposure time and marketing time (which is not required by USPAP) is presented in Statement 6 of USPAP.

• The revisions discussed above relating to exposure time were carried forward to Standards 1 and 2 (development and reporting of a real property appraisal), as well as standards relating to exposure time in personal property appraisal development and reporting. Statement 6 was also revised to ensure consistency between it and the definition of exposure time.

• The certification statements under all reporting standards (Standards Rules 2-3, 3-6, 5-3, 6-9, 8-3 and 10-3) were revised to make a housekeeping edit related to a change that was made in the 2010-11 USPAP. At that time, the Ethics Rule introduced a new requirement of disclosure to potential clients when the appraiser provided service on the property (as an appraiser or in any other capacity) within at least a three year period prior to the new assignment. It was up to the appraiser to add a certification to the report as part of the disclosure requirements. Many of our clients requested a negative statement in the appraisal even when we did NOT provide such a service. This change simply adds a line item and the appraiser would check the appropriate box: “I did (or I did not) provide a service”, similar to” I did (or I did not) inspect the subject property.” If you were paying attention in your 2010-11 USPAP class, you would have been expecting this change, as it was obvious from the Appraisal Standards Board that it was coming in 2012.

• So far, the above changes don’t introduce anything new; they only make things clearer. However, the 2012-13 USPAP also includes creation of a new RECORD KEEPING RULE. Currently, the Ethics Rule consists of the Conduct, Management, Confidentiality, and Record Keeping sections. By definition, an appraiser must follow the Ethics Rule at all times (when acting as an appraiser). But often our appraisal practice includes assignments that don’t require record keeping. This change makes following the Ethics Rule easier by taking the Record Keeping responsibilities out of the Ethics Rule and establishes its own Rule to follow when relevant. The text is primarily unchanged, just moved to another part of USPAP. However, related edits to the Conduct section of the Ethics Rule make it a violation of the Ethics Rule to not properly follow the Record Keeping Rule. So be clear about your responsibilities under the Record Keeping Rule or you may be fined twice for the same oversight.

• The 2012-13 Advisory Opinions include welcome revisions to Advisory Opinion 21, USPAP Compliance. The revisions are primarily related to the examples used as “In The Real World” illustrations in the National USPAP update class. Again, here the revisions are for clarity and not to change the way appraisers practice.

• Lastly, although not affecting the Standards that real property appraisers typically follow, there were also clarifications made to Standards 7 and 8 for personal property appraisal development and reporting. These revisions were to improve the language used in the standards that better use personal property terminology.

These changes will take effect on January 1, 2012 and will continue through December 31, 2013. The Appraisal Foundation wants every appraiser to have their own copy of USPAP to refer to. You can typically buy hard or digital copies of the documents directly through The Appraisal Foundation, or they are often included in the cost of a USPAP course. In addition, if you are member of certain appraisal organizations, the document may be provided to you as a membership benefit. It is not yet clear what the cost of the 2012-13 document will be. The cost went up to $75 for the 2010-11 version, up from $50 for the 2008-09 version. Digital (pdf or interactive versions) are often cheaper.

The 2012-13 USPAP document will be published by the Appraisal Foundation and will be available starting in October. October is also when the 7-Hour USPAP Update classes will begin to be available for appraisers to learn the material in a classroom or distance setting. Each USPAP instructor must be recertified in the material before they are allowed to offer the class. Therefore, it may take a couple weeks into October before you can find the class in person. But it may be available online prior to most classroom courses. Because many of you will choose to take your USPAP Update online, my next post will be about assessing the quality of distance appraisal course options. Thank you for reading. I look forward to your comments.

Traps of the Restricted Use Report

2011-05-11T21:12:00.000-07:00

The Uniform Standards of Professional Appraisal Practice provides for three written appraisal reporting types: Self-contained, Summary, and Restricted Use Reports. Appraisers seeking to diversify their practice might be tempted to experiment with a Restricted Use Appraisal Report. It can be a good tool for both appraiser and client when used properly. This topic focuses on the traps associated with using the Restricted Use Report.

1. Other intended users. The restricted use report is for when the client and the intended user are one and the same. No one else will rely on the conclusions, such as attorneys, opposing counsel, a judge, the IRS, a seller, etc. The amount of detail in a restricted use is limited to sufficient information for the client to understand the report. In these cases, the client is often either very familiar with the subject property (the property to be appraised) or appraisals in general. Often, the intended use does not allow the use of a Restricted Use Report because more than one party will need to rely on the report, such as for open negotiation purposes.

2. Appraisers who were appraising prior to 2006 often confuse the restricted use report to the limited scope appraisal, which provided for departure on select standards to allow the appraiser to provide a “quick and dirty” analysis. This kind of scope is still available through the scope of work rule, but the restricted use report format might not always be appropriate.

3. Labeling is important. USPAP requires clear labeling of the report option selected (in a written report). However, certain pre-printed forms may label the report as one of the three reporting options. Make sure that if you are preparing a Summary appraisal the form does not call it a Restricted Use Report, or vice versa.

4. Provide sufficient information. Boilerplate language makes its way into many appraisal reports that indicate that additional information to understand the appraisal is provided in the workfile. This stems from Advisory Opinion 12. However, USPAP was subsequently changed to provide that all reports must contain sufficient information for the client (and intended users) to understand the report.

5. Allowing assignment conditions to provide less than summary. This can go back to Item #3 above. If the Client requests that the appraiser use a certain form or format, the Appraiser is responsible for ensuring that the report type selected communicates the process, analysis, and conclusions in a manner that is not misleading. If assignment conditions, such as report form or format, completion timeframe, fee charged, or anything else is such that the appraiser must limit what is communicated, the appraiser may be asking for trouble.

Don’t think the restricted use report is that difficult. Like any other report format, provide sufficient information regarding the appraisal process, data selection and analysis, and reconciliation and conclusions necessary for the intended use. Refer to the Ethics Rule, Standards 1 and 2 and Advisory Opinions 11 and 12. Have fun with it and experiment with different formats. I look forward to your comments.

2011 High Desert Economic Summit

2011-03-31T18:35:00.000-07:00

This is a summary of the 2011 High Desert Leaders Economic Summit that was held March 24, 2011 at Victor Valley College. It included both public agency speakers on behalf of the cities and County as well as three regional economists providing their explanations and forecasts for the area. Such events are good “market trends” seminars for appraisers to understand what is going on the area in which they appraise. This particular event’s proceeds benefitted the High Desert Red Cross. Copies of presentations are available at http://hd-redcross.webs.com/economicsummit.htm.

Opening. The event raised enough cash to purchase a 4-wheel-drive vehicle for the local Red Cross Chapter that will be purchased from one of the High Desert dealerships.

The City of Adelanto was presented by Mayor Cari Thomas. She indicated that there has been a slight increase in Adelanto’s population each year since 2006. Foreclosed homes are starting to be occupied again. The Police Department merged with the Victor Valley force and the City saved $500,000. There will be a new fire station at Verbena & Bartlett by the end of the year. A new Emergency Operations Center will open in June 2011. The city recently completed a channel crossing and moved George Elementary off the former base property. A new high school is set for 2012. Lewis Retail is still ongoing with a new center planned for Mojave & Hwy 395. A new correctional facility is pending. The City has done some economic branding in partnership with the Chamber of Commerce. The City has been actively seeking grants and was awarded a $1 million dollar grant for the North Adelanto planning effort. They are still seeking a grant for a 50-acre park master plan.

The Town of Apple Valley was presented by Mayor Scott Nassif. He indicated that Apple Valley absorbed 300,000 square feet of retail space in the last five years. The town has new facilities for the Animal Shelter, Development Services, and Public Works. They are preparing for the Yucca Loma Bridge project which will assist with goods movement. They are preparing a Multi-species Habitat Conservation Plan (similar to Riverside County), which will be a comprehensive approach. The North Apple Valley Specific Plan allows quick entry into industrial development. Challenges still include infrastructure (water, sewer, roads) throughout.

The County of San Bernardino was presented by Supervisor Mitzelfelt. The High Desert was the fastest growing region of the County from 2000 to 2010. Logistics and manufacturing account for 27% of the economy in the County. Renewable energy jobs are coming with the following projects: Calico (Dagget), Abengoa (Harper Dry Lake), and Bright Source (near Primm). Gold and silver prices are skyrocketing, as are applications to open new mines and to re-open old mines. Borates, soda ash, limestone and others are also being mined. Molycorp in Mountain Pass is also expanding mining operations. Construction costs are down 25% to 50%, which will save money on infrastructure projects and should increase construction jobs. The Business & Employment Resource Center had 15,200 visitors in 2010. “CSB Works” is a new business retention program with County EDA and Chambers of Commerce. Supervisor Mitzelfelt will unveil the County visioning process at the State of the County on April 6, 2011 (www.sbcountyadvantage.com).

The City of Barstow was presented by Mayor Joe Gomez. Fort Irwin and BNSF are the largest employers. The Walmart facility at Barstow Industrial Park has again been delayed until 2012. Barstow Hospital (new) will be completed in 2012. The City has started a new business incubator program at the old Harvey House; Lee & Associates is handling the leasing there. Tourism is still a big industry, as 60 million travellers pass through each year. They have created a new film commission to handle requests and permits.

The City of Hesperia was presented by Steven Lansberger, Economic Development Director. There were 91,496 people living in Hesperia in 2010. They are developing a “downtown” civic plaza, with a new cinema coming later this year. The City purchased the Competitive Edge Motocross Facility, with operations run by vendors. The facility brings 15,000 riders and national exposure. The City also purchased a golf and country club, which will be run by Parks & Recreation. The City had a 2010 designation as an Enterprise Zone and Recycling Market Zone. They also have a business retention program. The industrial lead track groundbreaking is April 20, 2011. They will do the Ranchero Road underpass in 2013 and are planning a workforce campus in partnership with Victor Valley College on 50 acres at Main & Hwy 395.

The City of Victorville was presented by Collette Hanna, Business Development Manager. In the 1990’s, the population increased from about 50,000 to 70,000, while the population increased to about 100,000 during the 2000’s. Southern California Logistics Airport (SCLA) is an aviation hub for the economy, creating new industries for the area in food processing and logistics. Projects include Foxborough Industrial Park with 650 jobs and 2 million square feet of space and an additional 1.3 million square foot space planned; 800,000 square feet of retail space in three phases at Hook & Roy Rogers; Auto Park at Valley Center, with seven new dealerships. SCLA includes Rubbermaid, Dr. Pepper & Plastipak, flight testing, and aircraft painting. The City is targeting strengthening the skillset of the local workforce and marketing existing buildings that are ready to lease. We believe she indicated that 41% of businesses in Victorville are closing!

Guest and Keynote speakers were:

John Husing of Economics & Politics, Inc. Job creation is coming back after losing 8.36 million jobs. The latest decline was steep and will be followed by a long slow recovery, like a checkmark. When people stopped buying, the stores were emptied. Inventory replenishment created goods movement, so it is a temporary surge, but still in the process of repair. The recession ended in 2^nd quarter of 2009 – what that means is that we’ve stopped digging the hole. However, we are still in it (and it is deep). As of 2010, we’ve lost all jobs in the Inland Empire that we created since 1998. The IE was responsible for 42% of the job growth to begin with (gold mine theory – construction, manufacturing and logistics drove jobs in good times and declined when bad). The poor areas have poor education levels. Vacant space beginning to dip below 10%. Recovery is 3 to 4 years minimum. Assessed values are up slightly. Still a deficit in health care jobs. John Husing presents his Annual Report Card on the economy on April 21, 2011 at www.johnhusing.com.

Larry Kosmont of Kosmont Companies. Generation Y is the customer of the future. They are tech savvy, mobile, prefer urban living, and have a sense of place. With the eastward expansion of the population, the high desert is gaining political clout. Business demands and jobs will drive the real estate market. The communities will be denser, with more infill instead of sprawl. There will be more public-private partnerships. www.Kosmont.com

Jerry Nickelsburg of UCLA Anderson Forecast. Job losses are at a quicker rate, but job replacements are slower than in previous recessions. Uncertainty = businesses and consumers hesitant to make moves. Unemployment has prevented the housing market from turning around and will likely stay high. Bernanke is flooding the market with liquidity to try to avoid “double-dipping” recession. Risks to recovery include trade wars, real wars, and slow growth economic policies. Home appreciation will occur first on the coast and then flow eastward following jobs; but is still several years away inland.

Defining the Appraisal Problem – my glass tabletop

2011-02-12T15:26:00.000-08:00

The Uniform Standards of Professional Appraisal Practice (USPAP) is a defined appraisal process that is given weight through state appraisal licensing laws as the minimum practice and care by those who call themselves appraisers. Other professionals, such as real estate brokers, accountants, and the guy on HGTV provide what we call valuation services. However, once they call themselves appraisers, or prepare what they call an appraisal, USPAP is the minimum standard of care. While other types of appraisers, such as guitar appraisers, wine appraisers, and those who value network television time slots, are not necessarily subject to appraisal licensing laws, they should still comply with USPAP and the appraisal process, as it is intended for all appraisal work.

The Appraisal Process is a multi-step process that starts with the definition of the problem. Appraisers must understand the who, what, when, where, why and how of the problem to provide the correct value. To illustrate, let me tell you the story of my coffee table.

Bob and I had a coffee table made by the shop teacher at the high school where Bob teaches. It is gorgeous and made of wood with a large wood top. To protect the wood top during everyday activities, we decided to have a piece of glass made to lay over the top, so I could still see the beautiful wood grain, but couldn’t actually spill my coffee all over it.

We went to the local glass shop and told them what we wanted. Bob had asked ahead of time and was told to measure from end to end. It only took a few minutes for them to cut the glass to size and I went back about an hour later to pick it up.

The technician brought out a large dusty, dirty piece of glass and started loading it into my car. I asked him why the glass was dirty? He said, “We don’t clean it”. I told him to hold on so I could inspect it before he could get it into my car. The corners were still sharp in places and the edges were not straight. I told the technician what I saw and he asked me “Is this going in a window frame?” I replied that it was for a table top. He apologized and said he’d take care of it and went back into the shop to clean the glass and grind it down for smoother and straighter edges.

Not all glass is cut the same, just like not all appraisals are approached the same.

The appraiser needs to understand who will use the appraisal (intended user), how it will be used (the intended use), and what value is required (type and definition of value). The client doesn’t always know the real problem when they order an appraisal – just that they want to know the value of the property. The appraiser’s job as a professional is to ask questions so that he understands the problem. Definition of the Problem is the first step in the appraisal process and is often the most important step, as it drives the rest of the appraisal process and satisfaction of the client.

I look forward to your comments.

Continuing Education

2011-01-26T21:11:00.000-08:00

I have been contacted over the years by too many appraisers seeking to fulfill their continuing education requirements at the last minute. There is no excuse for this.

There are so many good educational opportunities, both online and in the classroom, many of them free or nearly free. Even if the appraiser makes a commitment to not learn anything new, there are plenty of opportunities to obtain continuing ed credit throughout the licensing period so that he does not have to scramble in the last one or two months.

Here in California, licensed appraisers renew their licenses every two years, with submittal of proof of the bulk of education required every four years. The two-year renewal is USPAP only and the appraiser must submit a CE certificate for a 7-hour USPAP update class. The four-year renewal is for another 7-Hour USPAP class and an additional 42 hours of continuing ed taken over the prior four years.

Many appraisal membership organizations offer 2 to 3 hours of continuing ed with a membership meeting and more often than not include some sort of meal. Here are some choices in the Inland Empire:

The Victor Valley Appraisers’ Association meets monthly, alternating between breakfast and dinner meetings. CE is free to members and typically an additional $20 to $40 for non-members. www.reaaca.org/vv
The Southern California Chapter of the Appraisal Institute has membership meetings distributed among several branches. The Inland Empire area Eastern Branch meets periodically, primarily over lunch, and typically has 2-hour CE offerings included. Members and non-members are welcome for the same price. Additional branches in Orange County and Los Angeles meet over breakfast or dinner. www.sccai.org.
The Desert Area Real Estate Appraisers of the Coachella Valley meets monthly. They don’t usually offer CE at regular meetings, but provide a discussion forum to talk methodology and issues. They also provide crowd opportunities for continuing ed providers. In the last couple years, they have provided a couple free and nearly free CE events to their members as well as other interested appraisers.

The Appraisal Institute also offers an annual seven hour seminar each Spring specific to real estate market trends in the Inland Empire. This is usually an awesome array of presentations from experts in different kinds of real estate markets throughout the area, from housing to industrial, and covering both counties, from the Coachella Valley to the High Desert. Statistics and discussions from the event help put our own market areas in context.

If appraisers committed to attending three to four of these CE meetings a year, took the USPAP update every other year, and attended the Inland Empire Market Trends event every other year, all their continuing education requirements would be fulfilled.

But why stop there? There are so many good offerings to learn something new, to expand practice areas, to gain professionalism and other skills. You’ll find a select list of continuing education offerings in the Inland Empire and surrounding area on my website, updated about monthly. I also provide links to select online education providers.

If you know of additional groups that meet periodically and offer CE, let me know so I can tell others. I look forward to your comments.

Credibility v. Reliability

2011-01-19T21:34:00.000-08:00

An issue I have been grappling with over the last few years is the difference between, and balance of, credibility and reliability. We real estate appraisers often have to balance the credibility of our analysis with the reliability of our methods. Even following an era when appraisers were blamed when things went wrong with the mortgage “deal” the appraiser is still under pressure to complete the analysis quickly and cheaply in both lending and non-lending assignments. This leads to a scope of work and/or reporting decision in which the appraiser emphasizes one over the other to satisfy the needs of the client.

Credible is a USPAP term. The Uniform Standards of Professional Appraisal Practice (USPAP) is a defined appraisal process that is given weight through state appraisal licensing laws as the minimum practice and care by those who call themselves appraisers. Other professionals, such as real estate brokers, accountants, and the guy on HGTV provide what we call valuation services. However, once they call themselves appraisers, or prepare what they call an appraisal, USPAP is the minimum standard of care. While other types of appraisers, such as guitar appraisers, wine appraisers, and those who value network television time slots, are not necessarily subject to appraisal licensing laws, they should still comply with USPAP and the appraisal process, as it is intended for all appraisal work.

The current USPAP document defines credible as “worthy of belief.” Merriam-Webster Online provides a similar definition, “offering reasonable grounds for being believed.” I believe the reason USPAP has its own definition is for a nuance related to the public’s trust of the appraisal or appraiser. Appraisers are tasked with developing credible appraisals for our clients and “intended’ users of our appraisals. Developing our analysis in the proper way lends credibility. Providing support for our conclusions through sufficient explanation and reconciliation provides credibility to the appraisal.

Reliable is not a USPAP term, as the dictionary definition does not need a special nuance for appraisal practice. Merriam-Webster Online offers two definitions: 1) suitable or fit to be relied on (dependable); and 2) giving the same result on successive trials.

Both definitions appear to be appropriate for appraisal practice, as our clients and users of appraisals “rely” on our analyses per definition #1, to make their own decisions, such as:

should I buy this vacant lot?
should I lend $100,000 on that home?
should I accept this offer to purchase?

Definition #2 is also important in that it implies that if two different appraisers used the same data and applied the same methods, they would arrive at similar conclusions.

The problem is that often our analysis is credible while our methods are not. Or sometimes the opposite is true – we use reliable methods, but don’t fully develop the analysis. To further compound the problem, once the appraisal is delivered to our client, it is forwarded to many more people than we could know – all of whom may choose to “rely” on the appraisal.

In some instances, especially for residential mortgages, our clients ask us to complete appraisals quickly and cheaply, often using pre-printed, one-size fits all forms. While the forms were created to make the “appraisal product” easier to read and use, the appraiser often allows the pre-printed form to take the place of the standard appraisal process, which forces credible analysis to be secondary.

Credible analysis is at the heart of appraisal practice and will be discussed again here. Reliability of our methods and reports will also be revisited as I cover real estate appraisal from the ground up. I look forward to your comments.