Certifications: Understanding What You’re Signing

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Certifications: Understanding What You’re Signing

By Tim Andersen, MAI

As someone who consults with appraisers who find themselves on the wrong end of a subpoena, or receive a complaint letter from their state appraisal commission, it has been my experience that too many of us don’t read the Certifications we sign. Let me save you some grief.

USPAP breaks an appraisal assignment into two parts. Standard One covers developing the value opinion itself. Standard Two is the reporting standard. Once the appraiser forms a value opinion, the appraiser reports that opinion to the client. Usually, there is a written appraisal report, although oral reports are perfectly acceptable under certain conditions. This article considers specifically SR 2-3, the Certification (ibid; lines 728 to 772; p. 24, 25), which must be in every final written appraisal report.

Remember, each certification contains the language: “I certify that, to the best of my knowledge and belief…” There is no need to repeat this language as we review the Certification.

Take, for example, the following: “I certify that, to the best of my knowledge and belief, the statements of fact contained in this report are true and correct.” Note the Certification applies to the report, not the appraisal. The appraiser certifies the statements of fact(s) in the report are true and correct, but does not certify to the value opinion.

Why both true and correct? This is a necessary part of the report since a fact can be true but, at the same time, not correct. Consider, for example, a house that sells for $100,000. That $100,000 price is a fact, to which MLS attests. So, if the sales price of $100,000 is a fact, then how can it simultaneously not be correct? Suppose the seller took back a 100 percent purchase money mortgage, at one percent interest, over an amortization period of 98 years (monthly.) Our real estate broker and mortgage lending friends will conclude this is a $100,000 sale. We appraisers know it clearly is not, since these financing terms are not cash equivalent. A mortgage investor would want more interest over 98 years than merely one percent. Assuming that investor wanted the equivalent of 8 percent interest, then s/he’d pay about $20,000 for this mortgage. Since there was no cash down payment, this mortgage represents the entire cash value of the house, which is the cash equivalent of ±$20,000. While the truth is that the property sold for $100,000 (e.g., that’s the price), what is correct is the cash equivalent price is only (about) $20,000 (e.g., its market value.)

How does the appraiser determine if all of the facts in a report are true and correct? The appraiser verifies them with a party to the transaction. Many appraisers conclude that a printout from MLS, maintained in the workfile, is sufficient verification. However, unless the MLS was a party to the sale and purchase transaction, merely having an MLS printout in the workfile is insufficient verification.

The Certification states:
“…[T]he reported analyses, opinions, and conclusions are limited only by the reported assumptions and limiting conditions and are my personal, impartial, and unbiased professional analyses, opinions, and conclusions.”

This component of the Certification means the appraiser has no hidden assumptions or limiting conditions since the report sets them out clearly and conspicuously. This component makes it clear that everything that went into the report’s conclusions is open to scrutiny. This statement also abjures bias on the appraiser’s part. This part of the Certification declares the appraiser avoided all of the types of bias.

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Next is the statement “…the reported analyses, opinions, and conclusions… are my personal, impartial, and unbiased professional analyses, opinions, and conclusions.” Personal conclusions means that the appraiser has not plagiarized them; the appraiser personally did the analyses (or properly cited their sources) to arrive at the report’s conclusions. Then, the appraiser formed those conclusions without any bias; i.e., they are personal, not from someone or something else. Note here, too, the term “professional analyses,” which assumes a series of analyses done competently, rather than in a manner negligent or with a lack of due diligence.

USPAP defines bias as, “a preference or inclination that precludes an appraiser’s impartiality, independence, or objectivity in an assignment.” There are many ways to evidence bias, such as selection bias. This means the appraiser was subjective in the selection of comparable data. Notice carefully the language of Standard Rule 1-4. It expects the appraiser, to collect, verify, and then analyze all of the data necessary to arrive at credible assignment results. Only in this way can the appraiser avoid selection bias. Therefore, when signing the Certification, the appraiser certifies s/he has avoided all types of bias in forming a value conclusion.

By certifying that the analyses summarized within the appraisal report are personal to the appraiser, it implies the appraiser has gone through such analyses him/herself. It is therefore reasonable for the reader of the report to infer the entirety of such analyses is in the appraiser’s workfile. If not, that absence is a USPAP violation, since it implies the appraiser has misled the client/ intended user.

Then, the appraiser certifies that he or she has “… no (or the specified) present or prospective interest in the property that is the subject of this report, and no (or the specified) present or prospective personal interest or bias with respect to the participants in the transaction.”

This component declares the appraiser has no bias relative to the property itself, or to the parties involved. It also allows him/her to appraise property in which s/he has an interest, so long as s/he discloses it in the Certification.

Next is another declaration to aid in the transparency of the analyses behind the appraisal. “I have performed no (or the specified) services, as an appraiser or in any other capacity, regarding the property that is the subject of this report within the three-year period immediately preceding acceptance of this assignment.” Here, the intent is to prevent the client from perceiving the appraiser is in any way biased for or against the subject property by disclosing any relationship the appraiser may have with the property.

Occasionally appraisers appraise the same property numerous times for different entities. This component of the Certification discloses the appraiser has received knowledge of the property from having provided a past service involving the property. Because of the use of the word services, it is clear if the appraiser has provided any services relating to the property, the appraiser must disclose them.

If the above Certification components do not make clear the appraiser employed no bias in forming the conclusions summarized in the report, then the entry, “…I have no bias with respect to the property at its subject or to the parties involved with this assignment” should. This is a statement of fact within the report, thus it must be both true and correct (supra).

To make sure the appraiser has complied with the Ethics Rule, the Certification next declares, “…my engagement in this assignment was not contingent upon developing or reporting predetermined results.” This component reflects the definition of an appraiser, which includes the concept of appraiser independence. Ethics bind an appraiser to be independent of all of the parties to the transaction, whatever it is they want out of the transaction, any enticements they may offer the appraiser to “make a number,” or any of the appraiser’s personal biases. By disclosing this lack of contingencies, the appraiser also declares s/he has not functioned as an advocate for any party while preparing the appraisal and report.

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Occasionally, appraisers unwittingly function as covert advocates to one or more of the parties to the transaction. This can be as blatant as going to the high end of the value range even though the general market might be stable or declining. Alternatively, it can be a subtle as failing to collect, verify, and then analyze all of the relevant data in a neighborhood. This makes the final value opinion contingent on a value conclusion improperly (i.e., not credibly) formed. Both evidence bias. In this component of the Certification, the appraiser declares that s/he has not let bias or contingencies of any sort creep into his/her appraisal of the property, or reporting what the appraisal found.

The Certification continues: “…my compensation for completing this assignment is not contingent on the development and reporting of a predetermined value or direction in value that favors the cause of the client, the amount of the value opinion, the attainment of a stipulated result, or the occurrence of a subsequent event directly related to the intended use of that appraisal.”

This component is a continuation of the one immediately above it. Again, it speaks to independence, impartiality, and objectivity, the hallmarks of the competent and professional appraiser. This component makes it clear that the appraiser is not for sale, nor is an appraisal a commodity to be bought and sold, despite what many real estate brokers and mortgage lenders think.

Advocacy is also an issue raised by this component of USPAP’s Certification page. Appraisers are not advocates for their clients, nor for any of the various parties to the transaction. It is not up to the appraiser to protect a lender from underwriting or funding a bad loan (that’s the lender’s job). It is not up to the appraiser to help the buyers get their “dream” house, or defend them from making an unfortunate purchase. It is not up to the appraiser to make sure the seller gets as much money as possible out of the transaction. It is not up to the appraiser to help the real estate and mortgage broker(s) earn a commission.

Advocates are not and cannot be impartial. Therefore, appraisers cannot be advocates since, by definition, they must be impartial, independent, and objective. All three attributes must be present, otherwise the appraiser ceases to be an appraiser, thus becoming an advocate. Acting as an advocate (even inadvertently) when the public expects an appraiser to be independent, impartial, and objective, fails to “…promote and maintain a level of public trust in appraisal practice,” a violation that state appraisal boards tend to sanction.

Why are the above points on the Certification important? When we appraisers comply with USPAP, we give the public (which includes clients and intended users) reason to trust us, as well as what we do, how we do it, and why we do it. We also provide them with another reason to conclude that what we do provides them with more value that the output of an AVM. Then, because of the first two reasons, we also give them a reason to continue to use our services, rather than those of something automated which, frankly, are significantly less expensive and much faster than are we.

Nevertheless, we must earn this respect, since there is no reason for the public to bestow it on us. Moreover, since we are only as good as our last appraisal, we must earn that trust with every Certification we sign. Do we earn this respect anew with every Certification we sign? Or, do we give our clients another signed, certified reason to use AVMs?

 

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About the Author
Timothy C. Andersen, MAI is a commercial real estate appraiser, AQB-certified USPAP instructor, USPAP consultant, and the instructor for a new online course, How to Raise Appraisal Quality and Minimize Risk (7 Hours CE), designed to help appraisers stay out of trouble with their state boards and avoid lawsuits. Visit OREPEducation.org to enroll today!

 

 

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Comments (4)

  1. by JERRY A ALLEGRO

    what does it matter? no matter what you do your always wrong. if you follow uspap and the client like (property interlink, consolidated lenders resource (deadbeat),LRES, FHA, mountainseed make their own rules. the state of Texas is WORTHLESS and will not go after dishonest and discriminatory AMC’s. heaven forbid you get blacklisted for telling them no you wont be dishonest or not follow the guidelines. of course the appraisers are the ones who are beaten to death. never the real crooks,. love these amc’s that play the gotcha game with all these after the fact requirements not disclosed up front. Just got blacklisted from interlink because i returned work with requirements not agreed to up front. guess what i’m the bad guy. if i had even thought of anything crooked the skys would open up and the enforcement bozos would repel from the sky. I am so fed up with this industry and the”:no balls” “no ethics” people in positions of authority over our lively hood. WE HAVE NO PROTECTION NO UPSIDE. Where are our advocates. That’s right were here just so the amc’s can make a living off our backs. Without us where would they be?

    - Reply
    • Jerry, Tim’s EXCELLENT article was on another topic. In response to where are our advocates? One is right here. As I type this we have a number of issues we are dealing with at TALCB and TREC in Texas right now involving retaliatory and unfounded third party complaints against Texas appraisers. Additionally, we are also investigating allegations against a former TALCB member alleged to have abused his position while a board member by ‘going after’ specific appraisers that either ”broke” his real estate deals (as a broker) or those of his friends and associates. Your advocates have been here for quite a while. Where have YOU been? American Guild of Appraisers. Contact janbellas@appraisersguild.org or call me direct (714) 366 9404 (west coast)

      - Reply
  2. Great article by a knowledgeable and trusted source. It brings to mind the obvious conflict between USPAP and FannieMae with respect to data reporting and market analysis: SR 1-4 says analyze all data NECESSARY to arrive at CREDIBLE assignment results. Section B4 of the current FNMA Selling Guide, as well as the instruction on the 1004MC that most residential appraisers are forced to use, instructs the appraiser to limit data and analysis to DIRECTLY COMPETING data. Oops – conflict. Meanwhile, 4000.1 and the Appraisal Report Data & Delivery Guide for FHA/HUD instructs the appraiser to report broad-market data. Broad-market data more closely aligns itself with ALL DATA NECESSARY in SR 1-4. The “out” used by most who rely on the appraisal report is “peer actions”, i.e. what other residential appraisers completing similar assignments do in their development and reporting. USPAP is the appraisers final authority, but it is designed to leave the appraiser open to all manner of actions by state boards who don’t really wish to hear what “peer” actions may be – similar to the parent who asks the child if he/she would jump off of a cliff just because a friend did. The biggest threat to the residential appraiser is a pre-printed REQUIRED form.

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