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Author’s Note: Private appraisals aren’t really the “final frontier” for appraisers but it is a good metaphor. Private work for courts and disputes predates modern lending appraisals, so they should actually be considered the “first” frontier…but never let a good Star Trek saying go to waste!
Private Appraisal Work, the Final Frontier
By Rachel Massey
Private appraisal work is similar to Star Trek’s
final frontier* for us appraisers. It is one environment where residential appraisers are still valued. Our opinions are sought for work as varied as bankruptcy, estate, charitable contributions, pre-listing, before-and-after valuation, among other reasons. It is a place where we can show our clients just how valuable an appraisal can be. Or, it can end up showing our clients that a computer algorithm is just as viable. The choice is ours. This piece shows how private work is different from mortgage work, and how we can meet the needs of our clients and prove our value above that of a computer algorithm.
More Work, Varied Assignments
As mortgage work has started to slow down in large swaths of the country, and likely will continue to do so, the temptation to move into the private arena is appealing. This is an area where our work is valued by those who need it the most. Private work is not lending work, and there are different requirements for different clients. Intended use and users rule supreme. Do I have the patience to walk someone through the process who is not experienced? Maybe yes, maybe no. This is not a place where I would want to spout off a bunch of expletives to a client who bothers me, but instead try to step back and ask whether I need to explain it differently so it is understandable. The onus is on me, the appraiser, to help my client understand.
If I choose to proceed with these types of assignments, I need do so with competency and with the client’s best interests in mind. Each assignment is unique. While it is exciting to see my marketing pay off and to get a call to do a private assignment, sometimes it is better to pass on it, particularly if the problem is complex and I am not able to complete it competently. If experience and knowledge is missing, I must remember the Competency Rule of USPAP. This means that I have to disclose my lack of competency before accepting the assignment, do what I need to do to become competent, and then disclose the lack of competency and steps taken to become competent within the report. It is not as daunting as it sounds. USPAP allows this flexibility so that I can grow, and I am willing to spread my wings a bit and soar.
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One way for us to grow as a profession is to build a referral network. This referral network could be made up of accountants, attorneys, real estate agents and other appraisers. Be willing and ready to refer work to other appraisers when it is something out of your expertise. Most appraisers do so in kind. In fact, since I went on my own in August, around half of my work has been referrals from other appraisers in the area. I have referred some of them work over the years, and others I have just been willing to help with any problem they had. We really are stronger together, so build that appraiser referral network.
What about when the assignment is out of your comfort zone but you want to complete them going forward? One way is to obtain assistance from another appraiser who regularly does this type of work. Maybe they can be the lead and you can learn from them? Take a course or two and become familiar with the type of work you want to take on. It could be anything, from
tax appeal work to complex litigation. There are courses for almost everything we can imagine. Taking courses will help with the knowledge side but only experience makes you experienced, so decide if you can do it and then do the best job you possibly can.
Be familiar with the different types of assignments that you may receive. A
pre-listing appraisal serves to help the seller understand what market value is but we must also pay attention to current offerings. In a pre-listing assignment, we may find that the market analysis is one of the most important parts of the appraisal, in particular, to know where the subject is positioned in the market. The sketch may be of importance. Attention to small items that could detract from marketability and value could be important. It depends on your client’s needs. I am working on an appraisal for a sale between a landlord and tenant and both know the condition of the property. Although I will still describe it in the report, it will not be as robust as if the house were going on the open market.
An appraisal for a cash sale may have different requirements for the buyer. They may want to know more about the neighborhood and the market than would an appraisal for a seller (the seller, after all, knows their neighborhood). Same could be said for the description of the property itself, including more discussion of positives and negatives alike. We may point out something in the report that the buyer was not aware of. The appraisal report helps them make an educated decision so these types of reports typically have a lot of information contained in them.
What about tax appeal work? That is another venue for residential appraisers, although it is generally seasonal, whenever the new tax assessment notices go out. Although the intended user is the homeowner (or whoever is acting on their behalf), the report will be scrutinized by the assessor and board of review, and these are educated players who know what to look for. Structure the report in such a way that it immediately addresses the valuation and how you got there, since in most instances, only a small window is allowed for the homeowner to present their appeal in front of the board.
Estate work – know the definition of value that is required. It may or may not be an appraisal that goes to the IRS but the accountant/attorney or whoever is requesting the valuation, should be queried as to what type of value definition they need. Know that there is the value as of the date of death and there can be an alternate date. If you are doing work that will likely be provided to the IRS, understand the definition of qualified appraisal.
What about divorce work (marital dissolution)? This is a very common assignment type for residential appraisers. Does the client have a specific definition of value needed? Is the attorney the client or have they asked the homeowners to order the appraisal directly? Who is going to rely on the work? Even if our client is only one party, the report still has to be understandable to the attorneys involved since it may be used as the basis of value, unless two or more appraisals are obtained. It is unlikely that a divorce appraisal will end up in court, but it is best, in my opinion, to provide sufficient information so that anyone reading the report can understand it and how the appraiser arrived at their opinion. Be ready to defend it if necessary.
There is litigation work and expert testimony. The Appraisal Institute offers a series of three courses related to litigation assignments. If you are thinking of pursuing this type of work, I would suggest taking the series, or at least a couple of the courses.
Identifying the Problem
All of the types of appraisals addressed above flow directly into the first step of the appraisal process, that of “Identification of the Problem.” The first steps of the process include identifying the intended use and intended users. They include purpose, effective date, relevant characteristics and assignment conditions. Because there are so many different reasons to engage an appraiser’s expertise, there has to be discussion with the client about what they are trying to accomplish; why they are hiring us to begin with. This differs from mortgage lending assignments in that we are speaking directly with the client and may well have many conversations over the course of developing the assignment results, as well as after. They are our client and we owe a duty of competency and care.
Never underestimate the power of a good solid engagement agreement. This agreement could help spell out what we will do and what we will not do. It is always helpful as a way of avoiding a misunderstanding; misunderstandings can lead to complaints and none of us wants a complaint.
While we have a duty to our clients to help them answer their specific questions, sometimes the client is unhappy with the assignment results. We have to do our best and always provide an independent, impartial and objective conclusion. As long as they can understand our logic and thought process, even if they do not like the results, we have provided a valuable service. They came with a question and we are able to provide an answer. It is also important to remember that even if the client only needs truncated reporting, we still have to follow the appraisal process and USPAP. Less reporting does not necessarily mean less work.
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The Preamble to USPAP starts with these words “The purpose of the
Uniform Standards of Professional Appraisal Practice (USPAP) is to promote and maintain a high level of public trust in appraisal practice by establishing requirements for appraisers.” These words speak volumes. Promoting and maintaining a high level of trust in our services is paramount. To do so, we need to put the interests of our clients ahead of our own.
As appraisers, we have a tendency to love jargon. We may understand exactly what we mean by “intended user” and “client” and “extraordinary assumption” but do our clients? In my opinion, it is a best practice to write a sentence or two to explain what these terms mean. When we discuss the “sales comparison approach,” it helps to point out how the sales compare in more absolute terms, such as how Sale 1 is superior to the Subject and why a sale that is superior is going to have a higher sales price than the appraised value of the subject property. In short, we need to walk our clients through our thought process and how we arrived at our opinion of value. Although this is what we do in lending work as well, it is doubly important for someone who obtains only one or two appraisal reports in a lifetime.
If our business revolves around mortgage lending, we are used to dealing with clients who have a certain level of sophistication. They see appraisal reports day in and day out and know what to look for. Many of us have learned to truncate our verbiage because our lending clients do not want to read volumes. We have learned how to address areas that tend to be sticking points for Fannie Mae and Freddie Mac, such as bracketing elements of comparison. We are used to addressing our reports in a manner that the lending client expects. Can you imagine the befuddled look on a homeowner’s face when confronted with C3/Q4/2DET type UAD language on a sales comparison grid? Can you imagine their confusion when they look at a report that addresses Fannie Mae Guidelines as part of the narrative when they hired us to do an appraisal for the IRS? Can you imagine being a homeowner who has never hired an appraiser before who is confronted by a report that is full of jargon and gobbledygook? Use General Purpose forms as opposed to the Fannie Mae forms. Software packages do include GP options.
As more and more appraisers rush headlong into private appraisal work, we run the very real risk of providing inadequate work to the clients who need our services the most, thereby potentially fracturing the public trust we are bound to uphold and promote. But if we provide thoughtful and meaningful work that analyzes the market, if we consider the unique attributes of the property we are appraising and if we present our analysis and findings in a way that provides insight to our clients, we should remain valuable players in the valuation space. If we do not provide insight into our thought process and how we arrived at an opinion of value, we end up requiring our clients to take a “leap of faith” in trusting our judgment. In doing so, we risk becoming irrelevant. Our jobs can easily be completed by artificial means. Judgement and communication are a place we can stand apart.
About the Author
Rachel Massey, SRA, AI-RRS, is an AQB Certified
USPAP instructor and has been appraising full-time
since 1989. She is a Certified Residential Appraiser
in Michigan, specializing in relocation work for
various clients, as well as lake properties and
other residential properties. Please visit
https://annarborappraisals.com for more
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by Michael Ford, AGA, SCGREA, GAA, RAA, Realtor®
As always, Ms Massey has great ideas and comments. A point to be aware of; so called ate of death (easy) appraisals are NOT the same as appraisals for either estate or gift tax which have separate rules.
DoD appraisals are used to establish the beneficiary of the decedent’s estate new tax basis for future capital gains taxes. It may also be used as support for new depreciation schedules. The purpose is always Fair Market Value per IRS guidelines. Check with your regional IRS as to which guidelines to be used. Some accept the generic accounting definition. Others require more specific verbiage (can be found on my website under the value tab) http://www.mfford.com . Intended use is “tax compliance” (usually).
Estate Tax (Return Form 706) requires more familiarity with IRS appraisal requirements. Be aware the tax is on the estate conveyed and not the estate received by a specific beneficiary. They can vary.
Gift tax (or any non cash charitable donation has it’s own special rules (Form 709); AND IRS Form 8283 which is required to be signed by the appraiser.
Be aware that over or understated value appraisals in the facilitation of fraudulent returns go to Office of Professional Responsibility and the Department of Justice for prosecution…not to your state board. While there is generally more leeway than you’d find with a state board, the moment you cross a magic percentile threshold it’s a whole new ball game of worry.
Being honest is not enough. More than ever competency is required. Avoid discounts other than partition approach based discounts (depending on your state property partitioning laws). Leave DLMO for the accounting experts. It’s next to impossible to ‘prove’ and exceptionally difficult to support at higher rates (generally 255 to 50%+) There IS no safe haven discount.
Call me if you have any questions. No obligation. # via website.-
by Michael Ford, AGA, SCGREA, GAA, RAA, Realtor®
*DLOM -apologies for typo-
by James Scholl
Rachel, real estate agents have taken an increasing amount of the work using bpo’s or evaluations. We have still have a robust non lender side to our business but attorneys do use agents as well. Also as more appraisers pursue non lender work there will be fewer appraisals available per appraiser. Just a question of numbers. Relocation and Tax appeal are still strong. With Fannie Mae in the process of designing the new forms we may see further disruption in the appraisal world in two years.-