FAQ'S

Frequently Asked Questions

The Hanson Organization has prepared this Frequently Asked Questions Section to assist Clients in understanding certain nuances in the practice of real estate appraisal. Appraisal practitioners are financial professionals, comparable to accountants, with similar ethical responsibilities and standards of professional practice. This section is a form of guidance that responds to questions typically raised by clients, enforcement officials, users of appraisal services such as attorneys, lenders, and the public to offer advice and suggestions for the resolution of appraisal issues. The Hanson Organization’s comments presented may not represent the only possible solution to the issues discussed and the advice and suggestions provided may not be applied equally to all situations.  It is always prudent to discuss appraisal issues with the principal of The Hanson Organization at the beginning of any assignment. 

1. SCOPE OF WORK

What is the scope of work? 

The scope of work is the work specifications an appraiser performs to develop assignment results. USPAP defines the scope of work as the type and extent of research and analyses in an appraisal or appraisal review assignment. It is the appraiser’s responsibility to determine and perform the appropriate scope of work. The scope of work specified by the client is acceptable if it allows the appraiser to develop credible assignment results. If the scope of work specified by the client does not permit development of credible assignment results, the appraiser must either change the scope of work to what the appraiser determines is necessary to develop credible assignment results or withdraw from the assignment. The scope of work: (1) defines the nature of the valuation problem to be solved; (2) identifies the client and any intended users of the assignment results; (3) identifies the intended use or purpose of the assignment; (4) describes the subject property’s relevant characteristics; (5) defines the type of value produced and the applicable appraisal standards to be applied; (6) determines the effective date of the appraisal; and (7) applies any relevant assignment conditions necessary for credible results. The scope of work is the most important issue to be discussed with the client because it establishes the parameters of the assignment. The failure to understand and agree upon the scope of work between the appraiser and the client is a fundamental problem that creates the most dissatisfaction between a client and the appraiser. If there is a misunderstanding on the scope of work, the expectations of the client typically are not met at the conclusion of the assignment.  

2. EFFECTIVE DATE AND DATE OF THE REPORT

In preparing an opinion of the market value of a property in its current condition, what does “current” mean?

USPAP recognizes three different types of appraisals: retrospective, current, and prospective. A retrospective appraisal is a valuation opinion based upon a historical date. A prospective appraisal is a valuation opinion based upon a future date. Current appraisals occur when the effective date of the appraisal is contemporaneous with the date of the report. Because most appraisals require current value opinions, the importance of specifying both the date of the report and the effective date of the analysis is sometimes confusing. “Current” appraisal assignments are based on the effective date of the appraisal being contemporaneous with the date of the report. Contemporaneous means arising, existing, or occurring during the same time period. In this context contemporaneous is not intended to mean simultaneous. Because the time period may very well differ from assignment to assignment, one single specific time period cannot be provided that can be used for all assignments. However, for an assignment to include a current appraisal opinion there must not have been a significant change in the property characteristics or market conditions between the effective date of the appraisal and the date of the report. The effective date of the report is the date at which the analyses, opinions, and advice in an appraisal service apply. The date of the transmittal letter of a written report … prepared by the appraiser is the date it is communicated to the client. The date of the report may or may not be the same as the effective date of the appraisal. The effective date of an appraisal is a critical scope of work decision made by the client based upon the intended use of the appraisal 

3. ASSIGNMENT CONDITIONS 

What are assignment conditions in an appraisal? 

In an appraisal assignment, there are some situations that involve some level of uncertainty or risk-based upon an evaluation of market characteristics by the appraiser or when the relevant physical, legal or economic characteristics of the subject property under appraisal are either: (1) not known; (2) uncertain; or (3) cannot be confirmed in the normal course of an appraisal investigation. In the appraisal profession, the term assignment condition is a law, regulation, guideline, or other condition that can affect the scope of work of a valuation assignment. Assignment conditions are generally statements intended to specify or limit the scope of work and the appraiser’s obligations. Assignment conditions are extraordinary assumptions or hypothetical conditions that the client requires for the purpose of analysis. The identification of assignment conditions in an appraisal assignment is a part of the scope of work. Wherever the valuation conclusion appears in an appraisal report, the assignment conditions must be reported in order to avoid misleading the reader about the valuation conclusions. An assignment condition utilizes assumptions about relevant characteristics the appraiser cannot factually determine and limits the scope of the appraiser’s responsibilities in an appraisal assignment. An extraordinary assumption is defined as an assignment-specific assumption as of the effective date regarding uncertain information used in an analysis which, if found to be false, could alter the appraiser’s opinions or conclusions. A hypothetical condition is defined as a condition, directly related to a specific assignment, which is contrary to what is known by the appraiser to exist on the effective date of the assignment results but is used for the purpose of analysis. Appraisers may need to use extraordinary assumptions or hypothetical conditions in performing an assignment. When used in an assignment, they become part of the given data in that assignment and have a significant effect on the appraiser’s opinions and conclusions. The difference between the two terms depends upon what the appraiser knows. If an appraiser is uncertain and cannot verify a certain condition that is critical to the valuation but nevertheless has a reasonable basis to accept it as true, then the appraiser will make an extraordinary assumption. If, on the other hand, an appraiser is basing the analysis upon a condition known to be false, the appraiser will use a hypothetical condition. The client must evaluate the assignment conditions with the appraiser at the beginning of the assignment in the context of the scope of work in order to ensure the appraisal meets the client’s needs. 

4. DISCLOSING RESULTS OF APPRAISAL ASSIGNMENTS

Can an appraiser disclose the results of an appraisal assignment to parties other than the client? 

An appraiser can disclose assignment results but only if the appraiser receives authorization from the client before sharing assignment results with anyone else. USPAP states, in part: An appraiser must protect the confidential nature of the appraiser-client relationship. An appraiser must not disclose: (1) confidential information or (2) assignment results to anyone other than: the client; parties specifically authorized by the client; state appraiser regulatory agencies; third parties as may be authorized by due process of law; or a duly authorized professional peer review committee except when such disclosure to a committee would violate applicable law or regulation. 

5. CONTENTS OF A WORKFILE 

What information must be retained in an appraiser’s work file? 

An appraiser must prepare a work file for each appraisal or appraisal review assignment. The appraiser’s assignment work file serves several purposes. As in many other professions, the discipline of enforcement by public agencies and peer review, together with one’s self-discipline and dedication of effort, serves to ensure performance of assignments in compliance with professional standards. In addition to facilitating enforcement, a work file aids the appraiser in handling questions from the client or an intended user subsequent to the date of the report. An appraiser’s assignment work file preserves evidence of the appraiser’s compliance with USPAP and other information as may be required to support the appraiser’s opinions and conclusions.

6. VALUATION STANDARDS

What are the primary appraisal standards applied by professional appraisers in the performance of their assignments?

The Uniform Standards of Professional Appraisal Practice (USPAP) is one of the primary appraisal standards enforced by state appraisal licensing agencies throughout the United States. All licensed appraisers must apply these standards during appraisal assignments. USPAP is a federally mandated statutory standard enforced by state regulatory agencies with oversight by The Appraisal Foundation. USPAP is available free of charge at www.appraisalfoundation.org. Depending on the scope of work in an appraisal assignment, other standards may apply. Examples of other appraisal standards are the Uniform Appraisal Standards for Federal Land Acquisitions and the International Valuation Standards. Lending institutions, government agencies and other specialized users of appraisal services establish their own standards to meet their own needs by appraisal contract requirements through the scope of work. Although there are similarities among all major appraisal standards, USPAP represents the minimum acceptable standard throughout the industry. 

7. PUBLIC TRUST 

The expression “public trust” is used in USPAP. What is public trust and who is the public in the USPAP context?

The purpose of USPAP is to “… promote and maintain a high level of public trust in appraisal practice by establishing requirements for appraisers.” USPAP also states: (1) “The appraiser’s responsibility is to protect the overall public trust and it is the importance of the role of the appraiser that places ethical obligations on those who serve in this capacity.”; and (2) “An appraiser must promote and preserve the public trust inherent in appraisal practice by observing the highest standards of professional ethics.” The public trust refers to the need for the public to be able to have confidence that services provided by an appraiser are performed competently and in a manner that is independent, impartial, and objective. The public, whose trust the appraiser must promote and preserve, exists on several levels. The most direct is the appraiser’s client. In addition to the client, any additional intended users would be part of the appraiser’s public. But, even beyond the client and other intended users, there are other parties who may rely on the work an appraiser and the appraiser must be careful not to mislead such third parties.  The appraiser’s ethical responsibilities include: (1) An appraiser must perform assignments with impartiality, objectivity, and independence, and without accommodation of personal interests; (2) An appraiser must not agree to perform an assignment with bias; (3) An appraiser must not advocate the cause or interest of any party or issue; (4) An appraiser must not agree to perform an assignment that includes the reporting of predetermined opinions and conclusions; and (5) An appraiser must not use or communicate a report or assignment results known by the appraiser to be misleading or fraudulent. Ethical requirements promote the public trust.  

8. AUTOMATED VALUATION MODEL (AVM)

Are the results from an Automated Valuation Model (AVM) an appraisal? 

No. An AVM is not an appraisal. There are products such as “Zillow” available on the internet that purport to estimate value. These products are AVM’s with their own proprietary algorithms that may or may not reflect actual market-based factors influencing value or the relevant characteristics of a property. USPAP states: An AVM’s output is not, by itself, an appraisal, and communication of an AVM’s output is not, in itself, an appraisal report. An AVM is a tool that delivers an estimation or calculation, whereas appraisers arrive at a value opinion by applying their judgment and experience based upon market data.  An appraisal is defined as an opinion of value, which is distinctly different from an estimate or calculation of value. An AVM uses automated processes and cannot produce an opinion of value because only individuals can exercise judgment and form opinions. The Hanson Organization does not use or condone the use of AVM products in its professional practice. 

9. APPRAISAL REPORTS FOR FINANCING PURPOSES

Can an appraisal report be ordered by and prepared for a borrower under federal lending guidelines? 

No. An appraisal cannot be routed from one financial institution to another financial institution via the borrower. A financial institution should not accept an appraisal from the borrower. However, the borrower can inform the financial institution that there is an existing appraisal. Prior to accepting an appraisal from another financial institution, the institution should confirm that the appraiser is independent of the transaction, the appraiser was engaged directly by the other financial institution, and the appraisal conforms to the agencies’ appraisal regulations and is otherwise acceptable. The lending institution must order the appraisal. When that occurs, the appraiser’s client is the lender not the borrower. 

10. ORAL APPRAISAL REPORTS

Can an appraiser prepare an oral report under USPAP? 

Yes. Under USPAP, an appraiser must prepare a work file for each appraisal or appraisal review assignment. A work file must be in existence prior to the issuance of any report or other communication of assignment results. A written summary of an oral report must be added to the work file within a reasonable time after the issuance of the oral report.  The work file must include: (1) the name of the client and identity, by name or type, of any intended users; (2) true copies of all written reports, documented on any type of media; (3) summaries of all oral reports or testimony, or a transcript of testimony, including the appraiser’s signed and dated certification; and (4) all other data, information, and documentation necessary to support the appraiser’s opinions and conclusions and to show compliance with USPAP and all other applicable Standards, or references to the location(s) of such other data, information, and documentation.  A work file in support of a Restricted Appraisal Report or an oral appraisal report must be sufficient for the appraiser to produce an Appraisal Report. A work file in support of an oral appraisal review report must be sufficient for the appraiser to produce an Appraisal Review Report. Attorneys employ appraisers to prepare assignments based upon specific legal theories of the case for their clients. The reporting of appraisal conclusions to an attorney without the preparation of a written report is an oral report. Appraisers are permitted to provide oral reports under USPAP. A summary of such a report, along with the appraiser’s signed and dated certification needs to be included in the work file. 

11. PROPERTY INFORMATION USED BY THE APPRAISER

What information should the Client have ready for the appraiser prior to the inspection? 

The Hanson Organization employs a Project Information Checklist for each assignment based upon the scope of work consented to by the client. Prior to the inspection and after the initial consultation between the appraiser and client, The Hanson Organization prepares a Project Information Checklist and forwards it to the client. Obtaining this information prior to the inspection is important to expedite the appraisal process and to avoid assignment surprises at the time of the inspection. The most relevant project information is based upon the relevant physical, legal, and economic characteristics of the property under appraisal. This type of information typically includes: (1) Survey; (2) Legal Description (Deed); (3) Title Policy; (4) Financial Operating Statements during the last three years prior to the inspection; (5) Property Information such as engineering reports, environmental reports or anything related to the physical description of the site or improvements; (6) leases in their entirety including exhibits; (7) Plans or specifications of the building; (8) Flood Elevation certificate, if not in the survey; (9) Building permits, municipal approval resolutions; state or local permits; entitlement documentation; (10) Soils Report; (11)Wetland delineation map (12) easements, air rights, partial interests (leasehold, leased fee) documentation; (12) Riparian rights – riparian grant, riparian lease; (13) licenses on land; conservation easements; historic façade easements; (14) Solar leases; solar equipment description; power specifications of the improvements; power sharing agreements; (15) Bulkhead design & costs; (16) new construction costs; (17) Sales Price and Terms of the Real Property if purchased in last 3 years including any pending Option to Purchase, Contract for Sale, or Listing other than current contract; and (18) Condominium Bylaws, Condominium Association Agreements; Condominium budgets and monthly fee history for the past three years; Projected replacement component plans on condominium project for roof, mechanical systems, etc.;, if applicable. The condominium documents requested assume the project is a condominium.

12. TYPES OF APPRAISAL REPORTS

What types of appraisal report products can an appraiser produce for a client? 

USPAP sets minimum requirements but does not limit the ways in which opinions of value may be reported. The appraiser has discretion on how to present the report data and conclusions. USPAP recognizes two types of reports. Each written real property appraisal report must be prepared under either an Appraisal Report or Restricted Appraisal Report option and the report must state which option is used. The Appraisal Report, under USPAP Standard 2-2(a), is considered the most comprehensive report. The Appraisal Report scope of work requires the appraiser to summarize the data and value conclusions in a detailed comprehensive manner. The Restricted Appraisal Report, under USPAP Standard 2-2(b), is considered an abbreviated report version. The appraiser simply states in short declarative sentences the data and value conclusions. There are restrictions in the scope of work for a Restricted Appraisal Report that recognize the report could be misunderstood due to its brevity and lack of detail. The Restricted Appraisal Report is also known as an Evaluation. An evaluation is an appraisal and subject to all requirements set forth in USPAP.