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USPAP and the State Board
by Timothy Andersen, The Appraiser’s Advocate
When you think of USPAP and the state board, chills run up and down your spine, right? In any given year, the typical real estate appraiser has less than a five percent chance of getting that letter from a state appraisal board. But what happens when that letter thuds on your desk? It is not a time to panic, but it is a time to pay attention. Close attention. Life will go on. You will still be able to appraise real estate so you can make a living. But you will need help. (Remember, you can reach me by email at tim@theappraisersadvocate.com to help you when that letter does arrive.)
So, what is going to happen when USPAP and the state board become foremost in your professional life? It is likely the state board will send you a questionnaire to complete and return to the investigator. These questions will become the basis for the state’s investigation into any complaint filed against you. Therefore, you must answer those questions completely, fully, and truthfully. But, in the same vein, you must not give the state the rope to hang you with. For example, one question might be, “Were you compensated for the assignment?” Assuming you did not work for free, the entirety of your answer would be, “yes”. No more, no less. The state has no reason, frankly, to know your professional fee for that job. But one more thing:
Before we get into the questions, if you do get that letter from the state, you need to act now and not ignore it! You’ll need counsel from your E&O people, an attorney, and a USPAP expert. To fight the state appraisal board is not a job you do alone, so don’t try!
Now, let us get into some questions. Your state will want to know if you received an engagement letter and if that engagement letter is in the workfile. Remember, the engagement letter is an employment contract between you and the client. Examining this letter gives the state’s investigator the opportunity to determine if you complied with the conditions and stipulations of your contract. True, USPAP mentions nothing of contracts or engagement letters. However, if you agree to conditions and stipulations, but then do not comply with them, that is misleading the client. Typically, state appraisal boards do not look kindly at this.
Here is another question state investigators commonly ask: “did you complete and deliver the completed appraisal report as agreed in the engagement letter?” Again, this is a straightforward question with a straightforward answer, “yes” or “no.” And if the answer is no, the state will want to know why. Maybe there was a good reason such as a natural disaster or a death in the family. But to plead, “Well, I just got behind!” reflects poorly on you because it is unprofessional and weak. And it does the client, and all the other parties to the transaction needing the appraisal, no favors either. That reflects poorly not only on you, but on all appraisers, as well.
Next is a long question concerning the sales comparison approach. “Describe your process used for your sales comparison approach in this assignment. Please provide specifics. Explain in detail your selection process and search parameters. Indicate your data sources and the dates of your searches. Show from your workfile the location of all this information.” To answer this one is going to be a challenge, right? The state does not merely want copies of your MLS printouts. Rather, the state wants to understand the intellectual, practical, and ethical processes behind your choice of sales comps. In addition, the state wants to understand how and why you chose comps in neighborhood-X, but not in neighborhood-Z. In all candor, a lot of this goes to ferreting out bias. Bias of any type is not only a violation of state appraisal statute, but also a major violation of USPAP’s Ethics Rule.
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In looking at your search parameters, the state wants to understand if you chose to search for comps using price as a criterion. Why? Simply because to use price as a comparable search criterion is one evidence of bias. Specifically, selection and confirmation biases. If you do not know what these two biases are, please look them up so you can avoid them in the future. In addition to how you chose your comps, the state wants to understand how much time you spent searching for your comparable sales. There is no threshold of what a proper amount of search time is, but if you indicate that searching for, and then finding them, was a task that took five minutes to complete, the investigator is going to want to know why it was so short. Frankly, though, there may be an excellent explanation. Please explain that clearly to the investigator.
It is typical for appraisers to skip the analytics of the cost approach, despite what USPAP’s SR1-4(b) advises. As a result, the state will make it a point to ask specific questions about your use of this analytic. Let me quote from one state’s questionnaire, “Please provide specifics with regard to site value, cost of improvements, and depreciation …” This question is in keeping with USPAP’s SR1-4(b)(iii), which states, “The appraiser must analyze such comparable data as are available to estimate the difference between the cost new and the present worth of the improvements…” And that difference between the cost of new and the present worth of the improvements is accrued depreciation. So, if you choose not to use the analytics of the cost approach, that is your call. But the state may want a deeper explanation of the exclusion of the cost approach other than the boilerplate “…the cost approach is omitted since the market does not use the cost approach…,” which is circular reasoning, don’t you think?
It is likely the state will ask for names. Those names could include the AMC’s contact name and information, the seller’s and/or buyer’s names, the real estate broker’s names, and the name of the escrow agent. You rightly ask why these are important. It is likely the state’s investigator will contact these folks to verify the scope of work you indicated in the appraisal report. It is common to declare in real estate appraisal reports that the appraiser was in contact with any, some, or all these people, if not others as well. But it is also common for such statements to be empty boilerplates. If the state’s verification of these shows they are empty boilerplates rather than the truth, you are going to have the opportunity to explain yourself. None of these are going to be a problem if you have the answers to these questions, as well as any others the state may ask, available in the workfile. Which makes clear the importance of the workfile, does it not?
So, between now and the arrival of that letter, what can you do to prepare? First, check your workfile. It should be killer. If you need to bolster its contents, the time to do so is now, not after that letter arrives from the state. Next, check your reports. Please look at the boilerplate you use. Does that boilerplate make sense in the context of the appraisal report it is in? If not, do not use it anymore. For example, a statement such as, “the adjustments are as shown” does not mean anything, does not explain anything, and does not support your value conclusion. So, why is it in your report? Does your boilerplate reference outdated editions of USPAP or old editions of The Appraisal of Real Estate? If so, please update them. Errors such as these are unprofessional, reflect poorly on you and, by extension, on the rest of us, too.
Now, it is time to close the logic loop and bring this article to an end. Again, in any given year, your chances of a letter from your state’s appraisal board are low. But if that letter does come, you will need help, help from your E&O people, help from an attorney, and help from a USPAP instructor. And you will need a killer workfile as part of your protection. The time to assemble that killer workfile is now, not when you need it. In other words, to quote appraisal’s friend Blaine Feyen, “the time to dig your well is now, when you are not thirsty.”
About the Author
Timothy C. Andersen, MAI, MSc, USPAP instructor and CEO of The Appraiser’s Advocate, is the instructor of “How to Raise Appraisal Quality and Minimize Risk” (7 Hours CE). (OREP Members enjoy the course at no cost). Andersen has been in real estate and consulting since 1975 and is an AQB-certified USPAP instructor, USPAP consultant, author, instructor and expert witness. Andersen can be reached at tim@theappraisersadvocate.com.
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