This communication by the Appraisal Standards Board (ASB) does not establish new standards or interpret existing standards. Advisory Opinions are issued to illustrate the applicability of appraisal standards in specific situations and to offer advice from the ASB for the resolution of appraisal issues and problems.
SUBJECT: Performing Evaluations of Real Property Collateral to Conform with USPAP
APPLICATION: Real Property
THE ISSUE:
How can an appraiser operating under the Uniform Standards of Professional Appraisal Practice (USPAP) develop an evaluation of real property collateral (evaluation)?
ADVICE FROM THE ASB ON THE ISSUE:
Relevant USPAP & Advisory References
ASB Opinion on Evaluations of Real Property Collateral
Reporting the Results of an Evaluation
Under STANDARD 1, in developing 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
The SCOPE OF WORK RULE of USPAP states in part, “Appraisers have broad flexibility and significant responsibility in determining the appropriate scope of work for an appraisal, appraisal review, and appraisal consulting assignment.”
The terms “appraisal” and “evaluation” have special meaning and use for institutions regulated by and under the rules and published guidelines of the Office of the Comptroller of the Currency (OCC), the Board of Governors of the Federal Reserve System (FRS), the Federal Deposit Insurance Corporation (FDIC), the National Credit Union Administration (NCUA), and the Office of Thrift Supervision (OTS) (Agencies). The October 27, 1994, Interagency Appraisal and Evaluation Guidelines (Agencies’ Guidelines) discusses “evaluation” as a term used to describe an estimate of value for certain real estate-related transactions that are exempt from the Agencies’ appraisal requirements. The federal regulators have ruled that an appraisal must conform to generally accepted appraisal standards as evidenced by USPAP but that an evaluation need not conform to USPAP. This distinction is important because appraisers who are bound by USPAP must comply with USPAP whenever they provide an opinion of value.
Many professional appraisers and state appraiser regulators have expressed uncertainty as to whether evaluations of real property collateral comply with USPAP. Appraisers are concerned with the potential consequences of a violation of USPAP.
The October 27, 1994, Interagency Appraisal and Evaluation Guidelines state:
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An institution should establish prudent standards for the preparation of evaluations. At a minimum, an evaluation should: |
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An evaluation report should include calculations, supporting assumptions, and, if utilized, a discussion of comparable sales. Documentation should be sufficient to allow an institution to understand the analysis, assumptions, and conclusions. An institution’s own real estate loan portfolio experience and value estimates prepared for recent loans on comparable properties might provide a basis for evaluations. |
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An evaluation should provide an estimate of value to assist the institution in assessing the soundness of the transaction. Prudent practices also require that as an institution engages in more complex real estate-related financial transactions, or as its overall exposure increases, a more detailed evaluation should be performed. For example, an evaluation for a home equity loan might be based primarily on information derived from a sales data services organization or current tax assessment information, while an evaluation for an income-producing real estate property should fully describe the current and expected use of the property and include an analysis of the property’s rental income and expenses. |
Appraisers need to be aware that lenders regulated by different agencies may have different interpretations of the Agencies’ Guidelines. Lender institutions may have developed different requirements for evaluations based on their interpretations of the Agencies’ Guidelines. It is critical that the appraiser and the client have a mutual understanding of the intended use and the scope of work for the assignment. One way to enhance this mutual understanding is for the appraiser to request copies of the institution’s evaluation standards or requirements pertinent to the assignment.
Appraisers operating under USPAP may accept all requests for evaluations of real property collateral as long as the appraiser’s work meets minimum USPAP requirements.
When an evaluation assignment includes a request for an opinion of value, under USPAP the evaluation becomes an appraisal, which USPAP defines as “the act or process of developing an opinion of value; an opinion of value.”
Any request for an opinion of value of real property requires compliance with the SCOPE OF WORK RULE, which states in part:
The scope of work must include the research and analyses that are necessary to develop credible assignment results.
An appraiser must be prepared to support the decision to exclude any investigation, information, method, or technique that would appear relevant to the client, another intended user, or the appraiser’s peers.
An appraiser must not allow assignment conditions to limit the scope of work to such a degree that the assignment results are not credible in the context of the intended use.
If the evaluation request does not call for an opinion of value of a specific property, the request might be a part of appraisal practice for which there are no specific performance standards in USPAP. If the evaluation request requires information that is an aspect of value, but not an opinion of value, the appraiser would then be obligated to comply only with the Conduct, Management, and Confidentiality sections of the ETHICS RULE, the COMPETENCY RULE, the JURISDICTIONAL EXCEPTION RULE, and the SUPPLEMENTAL STANDARDS RULE. Examples of requests for services that do not require a value conclusion of a specific property include, without limitation:
providing sales and rent data, listings, assessments and other similar information, without adjustments to indicate the value of a specific property; and
providing data describing a neighborhood, community, or any other real estate market segment and analyses on real estate market trends.
Appraisers who believe certain requests for evaluations of real property collateral are inconsistent with USPAP or contrary to law should explain their concerns to the potential client. If necessary, additional information and advice may be obtained from the appropriate federal regulator regarding the Agencies’ Guidelines. Issues regarding state law should be directed to those state government regulators with jurisdiction.
A potential client requests two evaluations of real property collateral. The client wants as little as possible in writing on the current market value of the fee simple interest for each property. The client is knowledgeable about the market for the type(s) of property involved.
In either case, the appraiser should determine the appropriate scope of work to develop credible assignment results based on the problem to be solved before considering the reporting options of STANDARD 2.
One evaluation is for an existing single-family residential fee simple property in connection with a real estate loan of $250,000 or less. The client requests only the sales comparison approach for this residential evaluation.
If the appraiser determines that the sales comparison approach alone is sufficient to produce credible assignment results in the appraisal of the residential property, an evaluation based solely on this evidence can be performed in compliance with USPAP.
The other evaluation is for an existing office building, occupied by the owner (without a lease). The lender is considering a business loan of $1,000,000 or less that is not dependent on the sale of or rental income derived from real estate as the primary source of repayment. The client requests only the income capitalization approach for this office building evaluation.
If the appraiser determines that the income capitalization approach alone is sufficient to produce credible assignment results in the appraisal of the office building property, an evaluation of this property based solely on this evidence can be performed in compliance with USPAP.
Scenario #2: Value/Assessments
The potential client requests evaluations, including value conclusions, of the same two properties based only on their current assessments for real estate taxation purposes.
In the example of the residential evaluation, the appraiser should first verify the processes, accuracy, and reliability of the assessing agency. Assuming these are sound, the appraiser may be able to accept the assignment if the appraiser is competent to employ sales/assessment ratio techniques and employs a valid sales/assessment ratio analysis as part of the evaluation.
In the example of the office building evaluation, if the income approach is not used in determining the assessed value, the assessment analysis alone would not appear to be sufficient.
In either case, the appraiser must be sufficiently diligent to ensure that any value opinion will not result in significant errors of omission or commission and the scope of work is sufficient to produce assignment results that are credible in the context of the intended use of the assignment.
Scenario #3: Providing Market Information
The potential client requests a residential or office property evaluation but asks for an opinion on market trends or conditions and not an opinion of value. However, since market trend information includes data on aspects of value, these assignments may be completed as a part of appraisal practice, in compliance with USPAP, but no specific performance standards apply. USPAP would require that when an appraiser provides this service he or she do so competently, impartially, independently and without bias or accommodation of personal interests, in recognition of any applicable jurisdictional requirements, as well as any supplemental standards. As examples and without limitation, the appraiser could provide, as part of appraisal practice, information and/or conclusions on:
rent, sale, or assessment levels, for such purposes as to address a client’s need for market trend conclusions;
sales and/or assessment levels at various or certain points in time, for such purposes as to address sales/assessment ratio or loan portfolio ratio questions;
the rate of market absorption of new or existing properties–such as time from listing to sale or lease of a property, a set of properties, or a volume of space–for such purposes as to address questions on market supply/demand balance.
The above are examples of only a few of the many situations when an appraiser may best serve the client’s evaluation-related needs by simply providing market information without indicating a value conclusion of a specific property. Such assignments are not appraisals and have no specific performance standards in USPAP.
The potential client requests an evaluation on a vacant residential subdivision lot where many nearby lots have been sold and improved with new homes within recent years.
If a value opinion for a specific lot is requested, the evaluation could be performed and reported as an appraisal assignment under STANDARDS 1 and 2 of USPAP. Based on the definition of “appraisal,” an opinion of value may be expressed as a single point value, a range in value, or a value relationship.
If a value opinion for a specific lot is not required, the appraiser could provide a variety of market data, including a listing of sales that have occurred in the subdivision, or information relating to assessment values of other lots in the subdivision. Such an assignment is not an appraisal and has no specific performance standards in USPAP.
When reporting evaluations, appraisers need to be aware that the evaluation content, described in the Agencies’ Guidelines, differs from the content required for appraisal reports under STANDARD 2 (see Advisory Opinion 11). It is important that appraisers take care that the contents of their appraisal reports satisfy the requirements of STANDARD 2. When reporting the results of an evaluation that includes a value conclusion, an appraiser could use the Summary Appraisal Report format, as described in Standards Rule 2-2(b). In some instances, and depending on the client’s needs, a Self-Contained or a Restricted Use Appraisal Report may also be appropriate.
This Advisory Opinion is based on presumed conditions without investigation or verification of actual circumstances. There is no assurance that this Advisory Opinion represents the only possible solution to the problems discussed or that it applies equally to seemingly similar situations.
Approved July 18, 1995
Last Revised October 28, 2005
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