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: Scope of Work Decision, Performance, and Disclosure
APPLICATION: Real Property, Personal Property, Intangible Property
THE ISSUE:
The SCOPE OF WORK RULE states:
For each appraisal, appraisal review, and appraisal consulting assignment, an appraiser must:
identify the problem to be solved;
determine and perform the scope of work necessary to develop credible assignment results; and
disclose the scope of work in the report.
How are the requirements in the SCOPE OF WORK RULE incorporated into the process of developing and reporting assignment results?
ADVICE FROM THE ASB ON THE ISSUE:
Determining and Performing the Scope of Work
Disclosing the Scope of Work Performed
Problem identification is the beginning point of every assignment. The appraiser must gather and analyze the information needed to properly recognize the appraisal, appraisal review, or appraisal consulting problem to be solved. The information necessary for problem identification is presented in each Standard that addresses the development process for an appraisal, appraisal review, or appraisal consulting assignment. For example, Standards Rules 1-2, 6-2, 7-2 and 9-2 provide the assignment elements that must be defined and analyzed in order to identify the problem to be solved in an appraisal assignment. These assignment elements include the:
client and any other intended users;
intended use of the appraiser’s opinions and conclusions;
type and definition of value;
effective date of the appraiser’s opinions and conclusions;
subject of the assignment and its relevant characteristics; and
assignment conditions.
Identifying the problem to be solved is required in order to make critical judgments in determining the appropriate scope of work. Therefore, the assignment elements necessary for problem identification in an appraisal, appraisal review, or appraisal consulting assignment also serve as reference points in determining whether the scope of work performed was appropriate to provide credible assignment results.1
Additionally, proper identification of the problem to be solved is required for compliance with the COMPETENCY RULE, which states:
Prior to accepting an assignment or entering into an agreement to perform any assignment, an appraiser must properly identify the problem to be addressed and have the knowledge and experience to complete the assignment competently; or alternatively, must… (bold added for emphasis).
One of the assignment elements that affects the scope of work is assignment conditions. Some assignment conditions are not a matter of choice, such as an inability to inspect a property because it has been destroyed. Other assignment conditions are a matter of choice, such as a client’s request to perform a desktop appraisal of machinery and equipment to reduce fees.
USPAP recognizes that the appropriate scope of work may differ significantly for different assignments; the SCOPE OF WORK RULE provides flexibility in determining the scope of work. The competency necessary to determine an appropriate scope of work within the allowed flexibility resides with the appraiser. Therefore, while it is common and reasonable for the client to provide input to the appraiser regarding a desired scope of work, the responsibility for determining the appropriate scope of work resides with the appraiser.
The flexibility and responsibility are linked in the SCOPE OF WORK RULE when it states:
Appraisers have broad flexibility and significant responsibility in determining the appropriate scope of work for an appraisal, appraisal review, and appraisal consulting assignment.
This responsibility is described when the SCOPE OF WORK RULE states:
The appraiser must be prepared to demonstrate that the scope of work is sufficient to produce credible assignment results.
The client, for example, might request that the appraiser include, or exclude, specific inspections, data collection, or analysis in the scope of work. The appraiser may accept an assignment with these types of assignment conditions provided that the assignment results are credible in the context of the intended use. The SCOPE OF WORK RULE addresses this issue in the Scope of Work Acceptability section:
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.
An appraiser must not allow the intended use of an assignment or a client’s objectives to cause the assignment results to be biased.
Determining the appropriate scope of work requires judgment. This judgment rests on the appraiser’s identification of the assignment elements and understanding of what is required to solve the identified problem. In many assignments, experienced appraisers are able to make this judgment about the appropriate scope of work quickly because they have performed many assignments addressing a similar problem to be solved (assignment with similar assignment elements). In other assignments, the determination of the appropriate scope of work may require more analysis by the appraiser because the problem to be solved has certain unusual characteristics. In yet other assignments, the appraiser may begin with a planned scope of work but in the course of the assignment find that the planned scope of work must be modified in order to produce credible assignment results.
The SCOPE OF WORK RULE recognizes that the scope of work actually performed may differ from the scope of work initially planned, when it states:
Determining the scope of work is an ongoing process in an assignment. Information or conditions discovered during the course of an assignment might cause the appraiser to reconsider the scope of work.
The SCOPE OF WORK RULE explains that proper disclosure of the scope of work:
…is required because clients and other intended users rely on the assignment results.
The Rule also states that:
The report must contain sufficient information to allow intended users to understand the scope of work performed.
An appraiser must disclose research and analyses not performed when such disclosure is necessary for intended users to understand the report properly and not be misled.
These disclosure requirements apply to the scope of work performed, rather than the scope of work initially planned by the appraiser. The appraiser must disclose the type and extent of research and analyses that were actually completed in the development process. Additionally, the information required to allow intended users to understand the scope of work may include disclosure of research and analyses not performed. There is no requirement for the scope of work description to be in a particular or separate section of the report.
A real property appraiser is engaged to appraise
the market value of a twelve-unit apartment building. The appraiser initially
decided that the scope of work should include the inspection of two of
each of the three unit types (studio, one- and two-bedroom). In the course
of conducting the inspection, the property manager had a key for only
one of the two-bedroom units; thus the appraiser was not able to inspect
one of the two-bedroom units as planned.
The scope of work, which includes the degree of inspection, was affected
in this assignment because of lack of access. If the appraiser decides
that she has sufficient information to produce credible assignment results,
the appraiser can complete the appraisal based on the inspection completed.
The report would include a description of the scope of work performed,
stating that five units had been inspected.
A personal property appraiser was engaged to appraise
four sets of china. The intended use of the report was for litigation
regarding an estate. The client requested that all pieces of each set
of china be inspected, since one cause of action claimed that several
pieces were damaged.
When the appraiser contacted the estate’s administrator to arrange
for inspection, he was told that one set of china was in storage and could
not be retrieved until after the Court’s deadline for the submission of
expert reports.
In this case, assignment conditions have changed the appraiser’s scope
of work. The appraiser may not have sufficient information to produce
credible assignment results in the context of the intended use. The appraiser
should consult with the client on the proper course of action. The appraiser
may alter the scope of work to include the appraisal of only the three
sets of china available for inspection or use an extraordinary assumption
regarding the condition of the fourth set.
A business appraiser is appraising a closely held
business enterprise with real property and personal property assets. In
the course of the assignment, the appraiser’s research indicates that
the market for the company’s product is declining and management’s projections
are not supported. Therefore, the appraiser believes the company might
be worth more in liquidation than as a going concern, which would make
performance of the work addressed in Standards Rule 9-3 necessary for
credible assignment results.
The scope of work must be modified because of what the appraiser learned
in the course of performing research and analyses.
A real property appraiser is contacted by a potential
client to appraise an occupied manufacturing facility. The client requests
that the occupants not be disturbed by a property inspection. Additionally,
the client requests that the cost approach be performed in the appraisal
of the building. These
requests are assignment conditions and will be part of the appraiser’s
identification of the problem to be solved and determination of the appropriate
scope of work.
Accepting and completing this assignment requires the appraiser to:
Determine that the client’s assignment conditions do not limit the scope of work to such a degree that assignment results are not credible in the context of the intended use;
Gather information on relevant characteristics by means other than inspection and/or use extraordinary assumptions;
Include a cost approach in the scope of work, even if this approach is not otherwise necessary for credible assignment results; and
Properly reconcile the applicability or suitability of the cost approach in arriving at the value conclusion.
A real property appraiser accepted an assignment
to appraise a three-unit residential property. The intended use of the
appraisal was for mortgage financing. The
client requested that the appraiser not verify the legal status (e.g.,
compliance with zoning, building codes, use permits) of the three units
with municipal officials.
The appraiser withdrew from the assignment because she concluded that
the client’s assignment condition limited the scope of work to such a
degree that assignment results are not credible in the context of the
intended use. The use of an extraordinary assumption about the legal use
of the property would not produce credible assignment results in the context
of the mortgage financing use.
An appraiser was engaged to appraise a one-unit
residence. Based
on the appraiser’s identification of the appraisal problem, the appropriate
scope of work was determined to include development of the sales comparison
approach and cost approach. However, at the time of the inspection the
appraiser discovered that the property was not a one-unit, but instead
a three-unit property.
Based on this new information, the appraiser re-considered the appraisal
problem and the appropriate scope of work. The change in relevant property
characteristics for the subject property significantly changes the appropriate
scope of work; the initially planned scope of work is no longer suitable
and would not produce credible assignment results. The type of data to
be researched and the type of analysis to be applied changed when the
property type changed from a single-unit to a three-unit.
A new appraisal problem requires reexamination of the scope of work.
The appropriate
scope of work for the new appraisal problem includes an income approach,
and the cost approach is not necessary for credible assignment results.
The appraiser should consult with the client since the appraisal problem
has changed.
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 October 28, 2005
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