Clients and intended users of appraisal services are paying greater attention to whether appraisers employ and document the use of recognized methods and techniques (sometimes referred to as generally accepted appraisal methods). While this has long been a requirement of the Uniform Standards of Professional Appraisal Practice (USPAP), clients and other users of appraisal services have increasingly looked to the appraiser to support the analyses used when developing an opinion of value.
This change in focus has caused some confusion amongst appraisers as to exactly what is required of them to produce an appraisal acceptable to the client and compliant with USPAP. So, how does this affect the work of the TALCB?
First, let’s consider the USPAP requirement in Standards Rule 1-1. Part (a) of this rule requires an appraiser to “be aware of, understand, and correctly employ those recognized methods and techniques that are necessary to develop a credible appraisal.” To break down this requirement further, a “method” can be described as a systematic way of doing something; it implies an orderly logical arrangement (such as the sales comparison approach), and a “technique” can be described as the procedure or way of using basic skills to carry out a scientific or mechanical operation referencing practical or formal details.
With these general concepts in mind, consider the following Q&A’s:
How does TALCB’s Enforcement Division view USPAP’s requirement that appraisers employ recognized methods and techniques necessary to produce a credible appraisal?
When investigating a complaint or performing an experience audit, TALCB staff will ask: “What evidence in the appraisal report or the appraiser’s work file shows that the appraiser used appropriate methodologies and techniques (as recognized by the appraisal profession) in producing his/her opinion of value?”
Does TALCB’s Enforcement Division expect an appraiser to base his/her decisions on recognized methods and techniques?
Absolutely! USPAP requires the appraiser’s conclusions be supported by the evidence (verifiable data) and logic (reasoned analysis) relevant to the particular appraisal problem. Unfortunately, appraisers sometimes rely on the subjective application of adjustments based on experience and intuition, rather than the application of a recognized method and technique supported by explicit reasoning documented in the appraisal report and work file.
Does TALCB’s Enforcement Division expect an appraiser to use particular methods or techniques?
No, there could be a number of appropriate methods and techniques to solve a particular appraisal problem.
Are we looking for an appraiser to use only those methods and techniques recognized by a particular source?
No, a number of sources are available. It might be a professional organization, a course, a seminar, or industry publication. For example, in a residential appraisal, the publication/seminar Valuation by Comparison by Mark Rattermann is only one of many sources available to the appraiser.
How does TALCB’s Enforcement staff determine if an appraiser used appropriate methods and techniques?
TALCB Enforcement staff reviews the appraisal report and related work file to identify the use of recognized methods and techniques. Both the appraisal report and the work file should contain sufficient information to demonstrate the appraiser’s use of appropriate methods and techniques and how they were applied. TALCB staff will look for evidence in the appraisal report and the work file to confirm that the appraiser used verifiable data as the evidence for his/her analysis and supported the logic (method and technique) used in reaching his/her conclusion?
To better understand this issue, let’s review a common appraisal problem, such as determining the appropriate adjustments to the comparable sales used in the sales comparison approach, to walk through the steps and thought process an appraiser might undertake:
(1) Identify all the potential factors that influence market value;
(2) Identify those particular market forces acting on properties;
(3) Apply the appropriate methods and techniques to identify how the market would react to a specific property.
When appraising a residence, an appraiser must identify the principles explaining the actions of the market. One example might be the principle of substitution: a participant will not pay more for a particular property than the amount necessary to acquire similar properties of equal utility. Based on this principle (and other principles), an appraiser must apply the appropriate method to illustrate that reaction to a particular property. In this example that would be the sales comparison approach. The next step would be to select similar properties, which have sold and are considered comparable to the subject property. Differences in these comparable properties must be adjusted to reflect market reaction to the differences.
An appraiser could make these adjustments by using various techniques to measure those differences. One example of this might be using paired data sets for differences in gross living area (GLA). However, in some instances, a particular technique may not be appropriate or practical. Fortunately, there are other techniques available to the appraiser. In the residential example, an appraiser might decide to apply capitalization of income differences, estimate and compare depreciated costs, employ statistical analysis, or identify market preferences through buyer interviews. These are techniques available to an appraiser as identified in sources such as Valuation by Comparison by Mark Rattermann or Supporting Your Adjustments by Richard Hagar. Each technique has strengths and weaknesses, making it more or less applicable for a particular appraisal. By applying evidence and logic based on an understanding of the local market, an appraiser would select the most appropriate technique. Following this methodology and applying the appropriate techniques allows the appraiser to develop a credible indication of market value via the sales comparison approach.
We hope this article has helped to explain how the TALCB Enforcement staff reviews appraisal reports and work files to ensure compliance with USPAP and confirm that an appraiser has employed recognized methods and techniques when developing an opinion of value. In Part II we will provide examples of how the use of recognized methods and techniques might work, answer frequently asked questions, and identify resources available to assist an appraiser.