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What does “Misleading” Mean?
By Tim Andersen, MAI
What does “misleading” mean when it comes to an appraisal? Let’s try to answer this most important question.
USPAP’s SR1-1 makes it clear that to develop “…a real property appraisal, an appraiser must…be aware of, understand, and correctly employ those recognized methods and techniques that are necessary to produce a credible appraisal…not commit a substantial error of omission or commission that significantly affects an appraisal…and…not render appraisal services in a careless or negligent manner, such as by making a series of errors that, although individually might not significantly affect the results of an appraisal, in the aggregate affects the credibility of those results” (ibid).
SR2-1 teaches “…each written or oral appraisal report must…clearly and accurately set forth the appraisal in a manner that will not be misleading” (ibid – emphasis added).
Misleading is not a USPAP-specific term. In other words, USPAP does not define misleading, since the common business definition suffices. One definition of misleading is “giving the wrong idea or impression”. This is not sufficiently specific, however, to communicate what USPAP means by misleading. Therefore, consider this definition specifically in a USPAP context:
An appraiser misleads a client/intended user when s/he leads that client/intended user to a conclusion the facts, reason, logic, evidence, and/or analyses do not support; when s/he fails to lead the client/intended user to a conclusion the facts, reason, logic, evidence, and/or analyses indeed support; and/or by failing to support the facts, reason, logic, evidence, and/or analyses in the report, fails to lead the client/intended user anywhere.
Real estate appraisals deal in facts, reason, logic, evidence, and analyses. So, the appraiser engages in critical thinking to complete an appraisal assignment credibly. Therefore, the appraiser’s opinions, statements of facts within the appraisal report, the highest and best use conclusion and so forth must have their bases in facts, reason, logic, evidence, and analyses. SR1-4 makes it clear the appraiser must “…collect, verify, and analyze all information necessary for credible assignment results” (ibid – emphasis added).
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To mislead, in a USPAP context, involves an omission or commission (or both) of something in the above definitions which gives the wrong idea or impression about how the appraiser developed and/or reported the assignment’s conclusion(s).
In USPAP’s Certification (SR2-3) the appraiser certifies, “…my analyses, opinions, and conclusions were developed, and this report has been prepared, in conformity with [USPAP]”. It is this specific oath in USPAP that introduces the concept of misleading, as well as starts to explain it as USPAP contemplates it.
In SR1-1, USPAP makes clear the appraiser must “…be aware of, understand, and correctly employ those recognized methods and techniques that are necessary to produce a credible appraisal” (ibid – emphasis added). In light of this, consider the concept of highest and best use as a component of the appraisal process.
Highest and Best Use Analysis is one of two major-components of the fourth step in the appraisal process. It comes after the appraiser has identified the (appraisal) problem, determined a scope of work to result in credible analyses, collected the property data & described the subject property. It is part of the data analysis step in the appraisal process. In it the appraiser determines (a) the highest and best use of the site as if vacant, (b) the highest and best use of the site as improved, and (c) the site’s ideal improvement(s) (assuming the site were vacant).
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This order notwithstanding, the appraiser shows his/her conclusion of the improved property’s highest and best use, on the (vacant) site section of the form. Thus, highest and best use appears to be a function of zoning (a legal use). In reality, it is a function of its (a) legal permissibility, (b) physical possibilities, and (c) the financial feasibility of any improvements, either proposed or existing, as of the effective date of the appraisal.
To comply with the Certification in USPAP, the appraiser must use market data, evidence, reason, analyses, and logic to determine the site’s highest and best use as vacant, its highest and best use as improved, and what its ideal improvements would be were the site vacant.
Since the 1004 form does not have the space to develop highest and best use as if vacant, highest and best use as improved, and the ideal improvements as if the site were vacant, many appraisers simply conclude such analyses & reporting are not necessary. This simply is not true because the appraisal process, which USPAP enshrines as Standard One, calls for the three separate analyses as part of that process (supra). When an appraiser omits one of these, yet certifies that s/he complied with USPAP in forming the value opinion, that oath is misleading.
This monograph, in presenting a USPAP-specific definition of misleading, helps the appraiser understand what USPAP means by “…the appraiser must clearly and accurately set for the appraiser in a manner that will not be misleading…” (ibid).
In sum, the appraiser misleads the client/intended user that s/he followed USPAP in developing/reporting the appraisal, yet that statement is not true.
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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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