Blog #28: “What Does the State look For When it Asks for a Copy of the Appraisal Report and the Appraisal’s Workfile?”

So, what does the State look for when it asks you to send in a copy of your appraisal and the corresponding workfile? Potentially another important question is, “Why does the State want to look at my workfile and report?” In this blog, you’ll find some answers to those questions. Knowing those answers is a benefit to you since, when you know what the state looks for in situations such as these, you can avoid those you should avoid, yet incorporate those you should incorporate.

In essence, the state is looking at your workfile to determine how closely it hews to the requirements of USPAP’s Standard 1, the appraisal development standard. Then, it wants to determine, per the requirement of Standard 2, if you reported the results of your appraisal in a non-misleading manner.

After you’ve reviewed a lot of different appraisal reports, by a lot of different appraisers, it becomes clear that appraisers may do a good job of explaining how and what they did to arrive at a credible value opinion (Standard 1), but (for whatever reasons), they fail to explain why they did it (SR1-6; Standard 2). For example, part of SR 1-2(f) and (g) is the requirement to disclose any hypothetical conditions or extraordinary assumptions the appraiser used in forming a credible value opinion. Yet, as state boards tend to interpret USPAP (and they each interpret it differently), appraisers state they used these assignment conditions, but they typically fail to explain why they did so (i.e., there is no summary). Consider this example of an extraordinary assumption:

“Size data the County maintains on the subject indicate 2,173 square feet of gross living area (GLA), whereas the appraiser, using ANSI standards (which the County does not) measured it to be 1,994 square feet of GLA. Because the appraiser cannot measure the comparable sales to ANSI standards, as was possible with the subject, and to have a true “apples-to-apples” comparison among the subject and the comparables, the appraiser used the County’s GLA to conclude the value opinion herein. Therefore, that value opinion is subject to the Extraordinary Assumption the County measured the comparables to the same standards as it measured the subject. Had the appraiser not used this Extraordinary Assumption, the act of comparison the comparables, with their County measurements, to the subject, as the appraiser measured it per ANSI standards, might have affected the assignment’s results.”

In the above paragraph, it is clear the appraiser used County data to compare the sizes of the subject and the comparables. Because the appraiser was unsure of the standard(s) to which the County adhered in developing its measurements, where as s/he was sure of the standard(s) s/he utilized (i.e., ANSI standards), the appraiser utilized this extraordinary assumption to account for unknown and unknowable size differences between his/her measurements and those of the County.

Therefore, the State appraisal board (via its investigator[s]) is looking for (a) the data in your workfile to support your value conclusion(s), etc. in the report; and (b) it’s looking to see if the appraisal and report are credible (which, according to USPAP means worthy of belief – although USPAP does not make clear at all whose belief, or why he/she/it/they must believe something) and not misleading in the context of the report’s stated intended use. In short, what this means is the state looks to see if the appraiser followed Standard 1 in developing the appraisal (i.e., it is credible) and Standard 2 in reporting the appraisal (i.e., the appraiser’s communication of the results of the appraisal to the client is not misleading).

At this point, it is reasonable to ask, “In a USPAP context, what does support mean?” If you say the subject’s zoning is R-1 (or whatever), then the state’s investigator looks for something in the file that supports this statement of fact (see SR2-3 for an idea of how important it is to USPAP the statements of fact in a report be both true and correct). Then, if you say the subject’s current improvements comply with the zoning, the investigator looks for data and information in the work file to support this statement of fact, too (I,e., why you made that statement).

For example, if R-1 zoning permits only single-family residences, but the property owners have repurposed the residence into a duplex (likely without the proper building permits, etc.), the investigator looks in the workfile for evidence the appraiser determined this repurposed use is indeed a legal use. If that repurposed residence is not a legal use of the site, yet the appraiser appraised it that way (i.e., the current improvements, according to the appraiser, were the property’s highest and best use as improved), then that appraiser will likely have some serious explaining to do when s/he meets with the State board (via its investigator). This is likely if, for no other reason, the appraiser, by definition of highest and best use, must appraise to a legal use, not merely the use of the property as of the effective date of the appraisal (which would be to appraise to the standard of Value in Use).

To appraise to a property’s current use (without a critical analysis demonstrating its present use is its highest and best use

[as improved]

) is to appraise to the standard of Value in Use, not the standard of Market Value. Further, to appraise (inadvertently or not) to the standard of Value in Use when the client commissioned the appraisal of the subject’s Market Value, is blatant misrepresentation.

Next, the state may ask, “Is the appraisal credible and the report not misleading? In other words, does it answer the question(s) why? If you state in the report the subject’s zoning is R-1, and that the improvements comply with the zoning, then it logically follows that you have already answered the question precedent to making this statement, thus already know why they comply with the zoning. Further, you also have the ethical responsibility to summarize in the report why you reached this conclusion. For example, consider the following language specifically concerning zoning:

“Per the City’s zoning map (by reference), the subject has an R-1 zoning category. This zoning category permits single-family residences, but not multi-family uses, mother-in-law apartments, outdoor storage of recreational equipment, and so forth (entire zoning code by reference). Because the subject is a single-family residence, without any of the prohibited uses as of the effective date of the appraisal, it conforms to the R-1 zoning”.

This summary of the zoning, as well as the subject’s conformance to it, should meet the reporting requirements of all but the most challenging of assignments. Of course, it is also imperative the appraiser have done all of the work the above paragraph implies.

Shall we review about credibility, not misleading, and statements of fact in the report being both true and correct? There are six (6) components of Standard 1 (i.e., SR1-1 thru SR1-6). This means the appraisal must be credible in the light of its intended use, as well as be in conformance with all six of Standard 1’s components. Then, to report the findings of the appraisal to the client (Standard 2), that report must lead the client to only the conclusion(s) the market-facts and market-evidence support. If it leads the client anywhere else, that report is misleading¹.

Remember, the appraisal must be credible in the context of its stated intended use and the report must not mislead the client. Those two broad categories are what the State looks for when it reviews the appraisal (the workfile) and the appraisal report.

So, to answer the question that begins this blog: When the state asks for a copy of the appraisal report and the workfile, it seeks to find the appraiser’s support for the value opinion, as well as support for any and all conclusions in the report. Are the statements of fact in the report true and correct? Do the value opinion and other conclusions have credible market-support?

Just as an example of the importance of a proper workfile, etc., this redacted² copy of the Florida Real Estate Appraisal Board Disciplinary Activity Report – 2010, (see http://www.myfloridalicense.com/dbpr/re/documents/2010FREABDARJan-Dec.pdf) gives an example of what the state board sought in both the appraisal, as well as the appraiser’s workfile, and what happened to the appraiser when the state did not find these (note: F.S. means Florida Statutes, Chapter 475, the Appraisal Statute; FREAB means the Florida Real Estate Appraisal Board):

“Pembroke Pines, FL – <Appraiser’s name>, state certified residential real estate appraiser . Respondent failed to note a prior transfer of the Subject property, and had the incorrect age for comparable 3, the incorrect GLA for comparable 2. Additionally, the Respondent’s workfile lacked documentation to support the adjustments and conclusions in the Sales Comparison and Cost Approach sections of the report. Violation: failed to exercise reasonable diligence in developing an appraisal report in violation of s. 475.624(15), F.S. and failed to retain, for at least 5 years, original or true copies of any contracts engaging the appraiser’s services, appraisal reports, and supporting data assembled and formulated by the appraiser in preparing appraisal reports in violation of s. 475.629, F.S. Penalty:, fined $2000, costs, 18 months probation, subject to early termination and 30 hours education to include successful completion of the 15 hr. USPAP course, attend one (2-day) FREAB general meeting. Effective 11/29/2010” (ibid; emphasis added).

It’s important to understand the state’s charge here of failure “…to exercise reasonable diligence…”. Let’s suppose the disciplinary process for this appraiser, from getting the state’s letter to completing the education, to paying off the fine, took one year. Now, was saving 60-minutes to one-day by not exercising proper diligence worth all the time, money, and effort it would have required to comply with USPAP and the state’s appraisal statute?

And what are the benefits of compliance with Standards 1 and 2? Staying out of the clutches of the state board is a great start, don’t you think?

If you have any questions on USPAP, or find yourself on the wrong end of a letter from your state appraisal board, contact me, Tim Andersen, The Appraiser’s Advocate, at tim@theappraisersadvocate.com. It will be an honor to work with you!

1To mislead is NOT to commit fraud, notwithstanding what some of our fellow appraisers aver. Fraud is a legal concept, not an appraisal concept, with a very strict definition, which courts tightly and narrowly interpret. That said, however, please understand that to misrepresent something in the appraisal or to mislead the client/intended user(s) in any way is to tingle the investigator’s spidery-sense and then to look for fraud. To violate USPAP is an administrative issue. To commit fraud, however, is a criminal act.

2This information is Public Record. I have chosen to redact it from this blog, however, to spare any party any further embarrassment. Note also that, as of this writing, this violation/decision is approximately 10-years old.