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: Normal Course of Business
APPLICATION: Real Property, Personal Property
THE ISSUE:
Standards Rules 1-5 and 7-5 require an appraiser to analyze certain information about the subject property if the information is “available to the appraiser in the normal course of business.” How does one determine the “normal course of business” for a given assignment?
BACKGROUND:
The analysis that is required in SR 1-5 and 7-5 promotes a certain degree of due diligence on the part of the appraiser. Appropriate due diligence increases public trust in the appraisal profession. The intent is to ensure that the research of past sales and current listings, options, or agreements of sale of the subject property is sufficient to promote public trust, without creating undue hardship on the appraiser.
The availability of the data necessary to comply with the requirements in SR 1-5 and SR 7-5 varies greatly. In some situations, this data is available from multiple sources. In other instances, sales and listing data is not readily available.
The “normal course of business” is controlled to a large degree by the scope of work in a specific assignment. Differences in intended use, intended users, the type and definition of value, or other factors can dramatically alter the scope of work. Therefore, the “normal course of business” for one assignment might not be the “normal course of business” for a seemingly similar assignment.
ADVICE FROM THE ASB ON THE ISSUE:
Relevant USPAP & Advisory References
— Standards Rules 1-2(h) and 7-2(h)
- For additional advice, refer to Advisory Opinion 1, Sales History
The “normal course of business” is determined by the actions of an appraiser’s peers and by the expectations of parties who are regularly intended users for similar assignments; it is not any one appraiser’s practices or any one appraisal firm’s policies.
To fully understand this concept one must examine the definitions of “Scope of Work” and “Appraiser’s Peers.”
“Scope of Work” is addressed in the SCOPE OF WORK RULE, Standards Rules 1-2(h) and 7-2h, and is defined in USPAP as:
the type and extent of research and analyses in an assignment
Researching the subject’s sales history is an aspect of the scope of work. The Comment to the Scope of Work Acceptability section in the SCOPE OF WORK RULE states:
The scope of work is acceptable when it meets or exceeds:
Therefore, it is not the work habits of an individual appraiser that define the “normal course of business” in an assignment. Rather, it is the requirements of the Standards Rules measured against the actions of the appraiser’s peers and the expectations of parties who are regularly intended users for similar assignments.
"Appraisers Peers" is defined as:
other appraisers who have expertise and competency in a similar type of assignment.
In addition to the concept of “normal course of business” in an assignment, an appraiser has the obligation to perform research and analysis appropriate to the intended use of the assignment. Standards Rules 1-1(b) and 7-1(b) state:
In developing a[n]…appraisal, an appraiser must:
not commit a substantial error of omission or commission that significantly affects an appraisal…
The Comments to these Standards Rules state, in part:
Diligence is required to identify and analyze the factors, conditions, data, and other information that would have a significant effect on the credibility of the assignment results.
A reviewer noted that a real property appraisal report did not include an analysis of a sale of the subject real property that had occurred six months prior to the effective date of the appraisal. The sale was reported in the local Multiple Listing Service (MLS), which is available to appraisers in the area and to which most area appraisers subscribe. When contacted about the matter, the appraiser stated that he did not subscribe to the MLS, and checking that data source was not within his normal course of business. Is this an appropriate response?
A real property appraiser is engaged to appraise a property that is located in a rural area. Sales prices are a matter of public record, but the records are not computerized, and personal analysis of the public records requires a trip to the municipal building and a great deal of time searching records. Local officials will not provide this information over the telephone. Most appraisers in the area analyze sales data by using information provided by a local on-line data provider and quarterly sales reports that are mailed out by the local jurisdiction. In this situation, what action is necessary by the appraiser to comply with the requirement to analyze the subject’s sales history?
A personal property appraiser is engaged to appraise a painting by a well-known artist for estate tax purposes. Neither the heirs nor the executor of the estate could locate the documentation for the purchase by the decedent, even though the painting had been bought less than six months before the appraisal was ordered. However, the sale was widely reported, both in newspapers and trade publications, since the painting had been purchased at public auction and at a price that set a new high for that artist’s work. The appraiser used sales of other paintings by the same artist to support the final opinion of value, but not the recent sale of the subject property, stating in the report that the documentation was not available. Does this comply with the sales history requirements of Standards Rule 7-5?
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 June 27, 2003
Last Revised October 28, 2005
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