William M. Novotny ISA AM
Personal Property Appraiser


Credibility and Client Reliance Requires Competent Appraiser Performance

When Does USPAP Require a Competency Disclosure?

William M. Novotny, ISA AM, AQB Certified USPAP Instructor
(First published in the Journal of Advanced Appraisal Studies, Foundation for Appraisal Education, Chicago IL 2011 and edited 8/2012)

Introduction

This paper explores a narrow matrix of USPAP (2010-2011) requirements applicable to the appraisal process. This paper focuses on the COMPETENCY RULE and the SCOPE OF WORK RULE as they apply to the generalist personal property appraiser when encountering types of property with which the appraiser has limited knowledge and experience. This paper will explain: Which Rule Rules…the SCOPE OF WORK or COMPETENCY RULE?

Different requirements of USPAP apply at various times in the course of an appraisal assignment. Other parts of USPAP are relevant and applicable to these two USPAP rules and will also be explored in detail as relevant. It is important for the appraiser to understand how and when a rule, a specific requirement or a part of USPAP applies in an assignment, and how USPAP requirements work in a complimentary manner, to protect the public. SECTION ONE and TWO of this paper will explore these issues in greater depth.

SECTION THREE will further explore these issues in a case study format utilizing hypothetical appraiser, John Morgan, a generalist personal property appraiser who must face these issues in a hypothetical appraisal assignment with two unusual objects.


The extent of knowledge and experience varies widely among appraisers. It could be argued that, to some degree, all appraisers have limited knowledge and experience. Regardless, whatever level of knowledge and experience the appraiser has, USPAP requires that it be sufficient to develop and report a credible opinion of value in every assignment.


In my personal appraisal practice I prefer to have a clarifying discussion with a client regarding unusual property types for which I may have limited knowledge and experience. This is most particularly true when the client might expect a level of expertise that may be greater than I possess.


Sometimes, in spite of this limited knowledge and experience, I feel competent to perform the assignment since I have performed similar assignments with sufficiently similar objects in the past. I also expect to find good data. But good data does not always result.


So when encountering an unusual property type, I often state to the client that “I am a generalist appraiser. I am not an expert in "x". I may need to consult with an expert regarding this "x" in order to properly understand its quality and value relevant characteristics. This statement does not yet equate to a competency disclosure. It depends on “Which Rule Rules?” The appraiser must decide when and if they are required to make a disclosure that they are not competent to perform the assignment. Letting a client know that the scope of work may include consultation with an expert is only a client communication regarding the anticipated scope of work that must be undertaken.


If the appraiser intends to make a competently disclosure, because he or she lacks the knowledge and experience to perform the assignment, then further explanation may be necessary. For example, the appraiser discovers a drawer with jewelry in a general contents appraisal. At such time the appraiser should disclose to the client “I am not a competent gemologist, I lack the training and the proper tools necessary to perform this assignment.” At this time the appraiser should propose or discuss a suitable plan of action. It is the burden of each appraiser, in each assignment to determine whether or not he or she is competent to perform an assignment or a component of an assignment.  

 
If the appraiser communicates that he or she may need to consult with an expert, but still feels competent to perform the assignment in regard to that property, then there is no USPAP requirement to make a competency disclosure.

It is important that the client understands that the scope of work might have to be expanded and, if so, that the client might incur additional costs. It equally important that that a lack of ability to perform an assignment be clearly disclosed in order to meet the COMPETENCY RULE requirements. With proper disclosure, the client may choose to withdraw the property from the assignment and have it appraised by a specialist, or instruct the appraiser to decline to value such a property.  The client may choose to avoid the additional expense. Careful judgment is required of the appraiser to make the correct disclosure.


Section One: USPAP Requires Competency on Multiple Levels

Appraisal Process Overview

Let’s begin with a brief review of the appraisal process. USPAP follows the appraisal process, a systematic process followed by all appraisers for solving valuation problems regardless of the asset type. Essential appraisal process steps, including problem identification, scope of work determination, and opinion development, all have significant USPAP competency requirements that apply. Each step of the process requires competent performance and must result in credible assignment results.

STANDARD 7 is applicable to the "development" of personal property appraisals, while STANDARD 8 is applicable to the "reporting" of appraisal assignment results. Each STANDARD establishes requirements that must be properly understood and competently implemented to ensure USPAP compliance, and, consequently, credible assignment results.


The first words in STANDARD 7 begin with a fundamental requirement that summarizes the “appraisal process”:


In developing a personal property appraisal, an appraiser must identify the problem to be solved, determine the scope of work necessary to solve the problem, and correctly complete research and analyses necessary to produce a credible appraisal.

Below are the specific steps of the appraisal process. The “SR” numbers refer to the specific requirements of the USPAP “Standards Rule” being addressed. Standard Rule one (SR7-1 (a-c)) can be briefly summarized as.

•    Know what your are doing (be competent), stay current with professional and legal requirements and the body of knowledge necessary to solve the appraisal problem
•    Be diligent and careful in following the appraisal process; commit no substantial errors;
•    Do not be careless or negligent


Note that as reflected by STANDARD 7’s opening paragraph, the first and most important requirement of the appraisal process, and the most important competency required, is the ability to identify the appraisal problem to be solved.

1.    Step 1 (SR 7-2): Identify the Appraisal Problem. This step requires that the following assignment elements be identified (USPAP 2010-2011):

•    (SR 7-2(a)): Identify the client and other intended users
•    (SR 7-2(b)): Identify the intended use of the appraiser’s opinions and conclusions
•    (SR 7-2(c)): Identify the type and definition of value to be used
•    (SR 7-2(d)): Identify the effective date of the appraiser’s opinions and conclusions
•    (SR 7-2(e)): Identify the item and its relevant property characteristics
•    (SR 7-2(f) and (g)): Identify any applicable assignment conditions (limiting conditions, extraordinary assumptions, hypothetical conditions or jurisdictional exceptions. 


2.    Step 2: (SR 7-2(h)): Determine the Scope of Work
After the appraisal problem has been properly identified, the appraiser is in a position to determine the scope of work that will be required to develop credible assignment results. In other words the appraiser can then perform the scope of work necessary to complete the appraisal process including steps 3 to 6 below.

3.    Step 3: (SR 7-3): Select the Appropriate Market, Collect and Analyze Data

4.    Step 4: (SR 7-4): Apply the Approach(es) to Value

5.    Step 5: (SR 7-5): Analyze Listings or Prior Sales of the Subject Property (only if developing an opinion of market value)

6.    Step 6: (SR 7-6): Reconcile Value Indicators, Arrive at Final Value Opinion


Once the appraiser’s assignment results are developed, the appraiser must judge whether his or her opinions are based on facts competently developed and analyzed. The problem solution must be relevant to the identification of the problem and the scope of work determination. The scope of work must be properly performed and sufficient to develop credible assignment results. There must a basis in fact, documented in the appraiser’s work file, or reasonable assumptions, properly disclosed, to support the assignment results.

When all of the above requirements are satisfied, then the appraisers opinions, analyses and conclusion must be properly reported in compliance with USPAP’s STANDARD 8. The scope of work actually performed must be disclosed. If a competency disclosure was made orally to the client during the course of the assignment regarding a deficiency in knowledge or experience necessary to perform the assignment, then that deficiency must be disclosed in the appraisal report along with an explanation as to how the appraiser remedied his or her lack of knowledge and experience to perform the assignment. These competency requirements are explained in this next section.

COMPETENCY RULE Overview

Let’s briefly review USPAP’s COMPETENCY RULE.

Prior to accepting an assignment the appraiser must first determine that he or she is competent to perform the assignment. The appraiser must have the necessary knowledge and experience to identify the problem and determine and perform the scope of work necessary to develop credible assignment results.


The COMPETENCY RULE requires that an appraiser must:


•    Be competent to perform the assignment; or
•    Acquire the necessary competency to perform the assignment; or    
•    Decline or withdraw from the assignment

Note that “competency” applies to many factors (not just knowledge about the property type being appraised). The COMPETENCY RULE’s Comment to its “Being Competent” section states:

“Competency may apply to factors such as, but not limited to, an appraiser’s familiarity with a specific type of property or asset, a market, a geographic area, an intended use, specific laws and regulations, or an analytical method. If such a factor is necessary for an appraiser to develop credible assignment results, the appraiser is responsible for having the competency…”

The appraiser is not required to withdraw from an assignment if a deficiency in knowledge and experience exists. The COMPETENCY RULE allows for remediation such as through further study and research as well as consultation with experts.

USPAP even allows for total reliance upon the analyses, opinions and conclusions of another individual without making a competency disclosure. For instance when two appraisers work together as peers, or an associate is asked to help independently in an appraisal assignment due to time constraints. Total reliance is allowed and must be properly disclosed. 

USPAP’s COMPETENCY RULE states that an appraiser who is unable to perform the assignment competently must:
•    disclose the lack of knowledge and/or experience to the client before accepting the assignment,
•    take all steps necessary or appropriate to complete the assignment competently, and
•    describe, in the report, the lack of knowledge and/or experience and the steps taken to complete the assignment competently.

Comment: Competency can be acquired in various ways, including, but not limited to, personal study by the appraiser, association with an appraiser reasonably believed to have the necessary knowledge and/or experience, or retention of others who possesses the necessary knowledge and/or experience.

When the appraiser decides not to make a competency disclosure, the appraiser must be of the opinion that the facts and data necessary for developing a credible analysis and opinion will surface through a typical market study/research and/or consultation with an expert.

Appraisers must have confidence that they possess sufficient knowledge and experience regarding the subject property, the appropriate market and other applicable legal or geographic competency factors. Appraisers must have the ability and judgment to analyze the facts and data gathered. They should always bear in mind that they have the option to consult with a person possessing the necessary knowledge and experience when it is necessary to develop credible assignment results.

The COMPETENCY RULE states that competency requires 

•    the ability to properly identify the problem to be addressed.
•    the knowledge and experience to complete the assignment competently, and
•    recognition of, and compliance with, laws and regulations that apply to the appraiser or to the assignment.

Note that significant assistance provided by others does not mean that the appraiser lacks the competency to develop or report a credible value opinion. The assistance of an individual with more expertise is part of typical opinion development and scope of work performance. Consultation can be a crucial step in the appraisal process, but it is not an automatic trigger for the appraiser to make a competency disclosure to the client. Remember the appraiser can embed another appraisers opinion in a report. The requirements will be discussed later in this paper.
 
What is the Most Important Competency Required?

As alluded to earlier, the most important competency required in an assignment is the ability to properly identify the assignment problem. This ability is essential. The entire appraisal process is based upon the identification of the problem. Problem identification is a precondition for the appraiser to be able to determine and perform the scope of work necessary to solve the problem. If the appraiser is not competent to identify the problem, the appraiser cannot continue in the assignment.

To properly identify the problem, one must first understand and identify the intended use of the assignment, i.e., how the assignment results will be used by the client. To better understand the significance of intended use, see USPAP’s STATEMENT 9 (SMT-9) Identification of Intended Use and Intended User. SMT-9 explains that whether or not assignment results are credible is measured in the context of intended use. Intended use is the most important assignment element that must be identified when identifying the appraisal problem (see SR 7-2). The identification of intended use is established through careful communication with the client.
 
What are the Most Important Steps in Problem Identification?

Problem identification begins with the appraiser’s initial client interview at the time of the assignment. The interview provides the appraiser the opportunity to identify the client, intended users and intended use, and to gather other information necessary to properly understand the assignment problem.


USPAP defines intended use and intended user:

•    INTENDED USE: the use or uses of an appraiser’s reported appraisal, appraisal review, or appraisal consulting assignment opinions and conclusions, as identified by the appraiser based on communication with the client at the time of the assignment.
•    INTENDED USER: the client and any other party as identified, by name or type, as users … by the appraiser on the basis of communication with the client at the time of the assignment.

Understanding intended use establishes the context or basis needed by the appraiser to identify some of the remaining assignments elements such as the type and definition of value to use (SR 7-2(c)).


Identifying intended users and their needs is of critical importance so that the appraiser is aware of the type and amount of work he or she must do, and to ensure that all information required by the intended users is included in the final assignment report.


When the assignment problem has been identified, the appraiser can then determine the appropriate scope of work for the appraisal and whether or not he or she is competent to perform the assignment.


The appraiser must understand and identify each relevant condition that is applicable to each assignment element (SR 7-2 (a –g)) in order to make a proper scope of work determination (SR7-2(h)). The appraiser can develop a specific work plan only after identifying the problem and determining the scope of work necessary to achieve credible assignment results.
 
Identifying the wrong value definition (SR 7-2(c)) during problem identification will undoubtedly undermine the appraisal. The appraiser determines the appropriate market to research (SR 7-3) based upon the value definition that he or she chooses to use.

When replacement value is chosen as the relevant definition (for an appraisal that is being conducted for orderly liquidation in a limited time frame) the resulting excessively-high price tags would not likely result in actual sales. Such an outcome is contrary to the clients intended use. The values generated to support a value conclusion should be relevant to the intended use. The retail or gallery market level that is appropriate for replacement value would not be the appropriate market to research for orderly liquidation pricing.

The Scope of Work Required in an Assignment

In 2006 the SCOPE OF WORK RULE was implemented. At the same time, Advisory Opinion (AO-28) Scope of Work Decision, Performance, and Disclosure and AO-29 An Acceptable Scope of Work were adopted. These benchmarks provide appraisers and appraisal users with a means to evaluate the acceptability of the appraiser’s scope of work determination.

The SCOPE OF WORK RULE states:


For each appraisal, appraisal review, and appraisal consulting assignment, an appraiser must:

1.    identify the problem to be solved;
2.    determine and perform the scope of work necessary to develop credible assignment results; and
3.    disclose the scope of work in the report.

Scope of work includes but is not limited to:


•    The extent to which the property is identified;
•    The extent to which tangible property is inspected;
•    The type and extent of data researched; and
•    The type and extent of analyses applied to arrive at opinions or conclusions.

The scope of work actually performed may differ from the scope of work that the appraiser initially determined would be necessary to perform in order to achieve credible assignment results. It is the work actually performed that must be disclosed in the assignment report.

How can an appraiser or intended user determine if the work performed was adequate or sufficient?

The Benchmarks that Establish Credibility


The SCOPE OF WORK RULE provides guidance to help appraisers, as well as intended users and reviewers, to determine whether or not the scope of work in a given assignment is sufficient to support credibility in an assignment. The Appraisal Standards Board (ASB) of The Appraisal Foundation developed the above-mentioned two Advisory Opinions which serve to provide guidance to appraisers and intended users regarding the scope of work: 


•    AO-28 Scope of Work Decision, Performance, and Disclosure, and

•    AO-29 An Acceptable Scope of Work

Advisory Opinion 28

AO-28 answers the question: “How are the requirements of the SCOPE OF WORK RULE incorporated into the process of developing and reporting assignment results?”

AO-28 states that:


The appraiser must be prepared to demonstrate that the scope of work is sufficient to produce credible assignment results.

The judgment of appraisers regarding the credibility of their own work is based on whether or not their analyses, opinions and conclusions are complete, adequate, relevant, appropriate, reasonable and sufficient (in the context of intended use and the needs of intended users), and whether the assignment results properly answer the questions posed by the client.


The judgments that must be made by the appraiser (and that are required by the SCOPE OF WORK RULE) are complex and similar to the judgments required by the COMPETENCY RULE. These judgments require competency based on knowledge and experience, and on a proper understanding of applicable USPAP requirements and a proper understanding of the appraisal problem.


Advisory Opinion 29


AO-29 provides guidance regarding the measure of acceptability of the SCOPE OF WORK RULE. AO-29 provides two benchmarks by which to evaluate the scope of work performed by appraisers in a specific assignment.


The SCOPE OF WORK RULE states that in order for the scope of work to be acceptable it must meet or exceed two benchmarks:


•    the expectations of parties who are regularly intended users for similar assignments, and

•    what an appraiser’s peers’ actions would be in performing the same or similar assignment.

An acceptable scope or work must satisfy both of the above-mentioned benchmarks which address the expectations of intended users as well as the actions of an appraiser’s peers. The appraiser must be prepared to justify his or her methods and techniques used, and to defend and explain the scope of work performed and the reasoning that provides a basis for intended users to believe that the assignment results are worthy of belief.


AO-29 answers the questions:


•    What makes an assignment similar?

•    Who are an appraiser’s peers?

•    Must an acceptable scope of work satisfy both benchmarks?

To establish that the scope of work is acceptable, the appraiser must learn to evaluate what makes an assignment “similar” and what makes another appraiser a “peer” for a particular assignment. For the scope of work to be deemed acceptable the appraiser must be prepared to meet both of the above stated benchmarks.
 
What Makes Assignments “Similar”?


As explained earlier, assignment elements identify the problem to be solved. The following assignment elements are identified in the SCOPE OF WORK RULE as well as within SR 7-2. In each appraisal assignment the appraiser must identify the problem based on these assignment elements:


•    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 property and its relevant characteristics
•    Assignment conditions


Assignments are similar when the above listed assignment elements used to identify the problem are comparable. The greater the commonality among assignment elements, the more similarity can be established between particular assignments. In other words, the intended use, type and definition of value, etc., must be similar in order for the assignments to be deemed “similar.”

Who are an Appraiser’s “Peers”?

Identifying an appraiser’s peer is always done in the context of a particular assignment. Determining if an individual is an appraiser’s peer requires examining the individual’s expertise regarding each of the above assignment elements used to identify the assignment problem.


USPAP defines appraiser’s peers as:


Other appraisers who have expertise and competency in a similar type of assignment.

In order for one to be considered a “peer,” that individual must have experience and competency with similar assignments, which, by definition, have similar assignment elements.


As noted above, in order for assignments to be deemed “similar,” they must contain similar assignment elements such as intended use, value definition, property characteristics, limiting conditions, etc. Differences in these assignment elements may cause profound variations in the competency and scope of work requirements between one assignment and another. Note that:


•    Expertise related to assignment elements determines if one is an appraiser’s peer.

 
•    Merely having expertise in appraising the same type of property is not sufficient to make someone an appraiser’s peer.

•    Holding the same credentials does not necessarily make one an appraiser’s peer.

The peer appraiser’s competency must be examined within the context of the assignment elements that define the appraisal problem. Different assignments require different types of expertise, so an appraiser could be a peer for some assignments but not others. To be an appraiser’s peer for a particular assignment, one must have the competency to identify the problem presented in the particular assignment. An appraiser’s peer would also have to be sufficiently competent to determine and perform the required research and analyses necessary to develop credible assignment results.
 
Section Two: Asking the Right Questions

The SCOPE OF WORK RULE requires that personal property appraisers do whatever is necessary to develop credible assignments results.


The COMPETENCY RULE requires the appraiser to


•    Be competent to perform the assignment;
•    Acquire the necessary competency to perform the assignment; or
•    Decline or withdraw from the assignment

If an appraiser determines he or she is not competent, the appraiser must:

•    Disclose the lack of knowledge or experience,
•    Take all steps necessary or appropriate to complete the assignment competently, and
•    Describe in the report the lack of knowledge and/or experience and the steps taken to complete the assignment competently.

When must an Appraiser Make a Competency Disclosure?


According to FAQ 83 (2010-2011 USPAP), there is no USPAP requirement that reports contain a statement that an appraiser is competent. The appraiser is only required to describe in the report a lack of knowledge and/or experience that prevents the appraiser from performing the assignment, and to describe the steps that were taken to remediate the competency deficiency and to complete the assignment competently.

The generalist personal property appraiser must understand when to comply with the COMPETENCY RULE and make a competency disclosure. The generalist appraiser is expected to be knowledgeable regarding many different property types and frequently is competent with many different types of general residential contents.


The more knowledge and experience a generalist appraiser has regarding each specific property type, the better able that appraiser is to identify the property, judge its quality, evaluate its condition, alterations, market acceptability, and to identify relevant property characteristics and how the market will likely respond to those characteristics in the appropriate market level. A properly-informed appraiser will better understand how the subject property relates to comparable properties that have been sold in the appropriate market.


Experienced appraisers have appraised many different property types and solved many different types of valuation problems. Because of their knowledge and experience, they often feel competent to develop and report their own opinions, and hopefully have the good judgment to know when to seek assistance from others, or to investigate further to ensure that they have gathered and considered the relevant facts.


An inexperienced generalist appraiser, on the other hand, will find it necessary to make competency disclosures much more often than an experienced appraiser. Due to their lack of knowledge or experience, and the fact that they may not have solved similar assignment problems or appraised similar property types, they should more often conclude that they are lacking in the knowledge and experience necessary to complete the assignment credibly, i.e., with competence. In particular, when objects are present that could have exceptional value the inexperienced appraiser should proceed very cautiously and seek the assistance of a more experienced individual.


The inexperienced appraiser should be cautious for many reasons. They may be unable to identify the subject property or its value relevant characteristics. They may not understand the market well enough to know what property characteristics (inherent in the subject property) drive the market and how those characteristics motivate market participants. They may be unable to evaluate whether or not their opinions are sufficiently developed and, therefore, credible. They may conclude their development prematurely or make other mistakes of omission or commission that might result in a USPAP violation and a failure to perform credibly.


The decision as to whether or not to make a competency disclosure is the burden of the individual appraiser. A competency disclosure is only required when the appraiser determines that he or she lacks the knowledge and experience to perform an assignment competently. A failure to make a competency disclosure when required, and to remediate the deficiency, would be a serious violation of USPAP. This would undermine the credibility of the assignment results, and, consequently, undermine public trust in appraisers. 
 
How Does an Appraiser Recognize that they Lack Competency?


Identifying the property and its relevant characteristics is one of the assignment elements that must be identified while identifying the appraisal problem.

When the appraiser encounters property types with which he has little or no knowledge or experience (e.g., gems & jewelry, machinery & equipment, pre-Columbian pottery, livestock, airplanes, stamps etc.), he or she should make an immediate competency disclosure prior to accepting the assignment. Otherwise the appraiser must be competent to comply with SR 7-2(e), which requires the appraiser to:


Identify the characteristics of the property that are relevant to the type and definition of value and intended use of the appraisal, including:

i.    sufficient characteristics to establish the identity of the item including the method of identification;
ii.    sufficient characteristics to establish the relative quality of the item (and its component parts, where applicable) within its type;
iii.    all other physical and economic attributes with a material effect on value.


Comment: Some examples of physical and economic characteristics include condition, style, size, quality, manufacturer, author, materials, origin, age, provenance, alterations, restoration, and obsolescence. The type of property, the type and definition of value, and intended use of the appraisal determines which characteristics have a material effect on value.

Not only must the appraiser have the necessary knowledge and experience relevant to the appraisal of the property type, the appraiser would need the tools and research sources necessary to develop credible assignment results. The appraiser must also be aware of applicable laws and regulations and geographical factors that apply to a property type.


When confronting particularly challenging property types, it is a good idea to discuss relevant issues (such as scope of work and limited knowledge) early on with the client so that everyone understands the objectives of the assignment and any relevant limiting conditions. An agreement that allows the appraiser to decline to appraise selected properties can be useful to contain costs and avoid competency issues. Remember the scope of work must be described in the report. This can include what was done as well as what wasn’t done.


Sometimes the appraiser’s opinion development and analyses does not proceed as smoothly as initially expected. The appraiser frequently encounters hurdles and issues that create uncertainty while attempting to develop a credible opinion of value or to comply with SR 7-2(e) which requires the appraiser to identify the property and its relevant characteristics. These hurdles could be indicators to the appraiser that he or she does, indeed, lack the requisite knowledge and experience relevant to the property type.  


Uncertainty is an important signal that cannot be ignored. A nagging doubt such as whether or not a tentative opinion of value regarding a specific object is truly credible is an indication that the appraiser should consult with an expert. If the uncertainty cannot be resolved, then it is time to decline to value the object or to make a competency disclosure to the client.


Remember, the appraiser must sign a USPAP certification statement (see SR 8-3), attesting to, among other things, that: 


•    the statements of fact contained in this report are true and correct.
•    the reported analyses, opinions, and conclusions are limited only by the reported assumptions and limiting conditions and are my personal, impartial, and unbiased professional analyses, opinions, and conclusions….
•    my analyses, opinions, and conclusions were developed, and this report has been prepared, in conformity with the Uniform Standards of Professional Appraisal Practice.

When confronting troubling uncertainty, even if late in the development process, the appraiser should disclose to the client that (in the course of the assignment) the appraiser discovered he or she lacks the required knowledge or experience to perform or complete the appraisal of an object competently. It can be a difficult moment to identify, and it might be awkward for the appraiser to make such a disclosure to a client so late in the assignment. But if such a deficiency is recognized, then the COMPETENCY RULE requires disclosure to the client and, additionally, in the report.

Why is a Competency Disclosure Necessary?


A competency disclosure is necessary because the client has a right to know if and when the appraiser determines that he or she is unable to develop credible assignment results for an object or objects. When the appraiser has doubts in regard to an object, or about the credibility of his or her opinions, analyses or conclusions, or when he or she feels “lost” or uncertain of how to proceed, the appraiser must carefully consider their options:


•    Make a competency disclosure and proceed in compliance with the COMPETENCY RULE, or

•    Decline to personally develop an opinion regarding the value of the property and suggest that the client retain a specialist for the property.

o    The specialist can then independently appraise the property, or

o    The primary appraiser can agree to incorporate the independent appraiser’s value opinion within his or her appraisal report.

The client has a right to know when an issue exists that could affect the credibility of the assignment results. The COMPETENCY RULE requires disclosure to the client and in the report so that the client can be aware of the deficiency and meaningfully understand how the appraiser addressed the competency issue. Only then can the client make an informed decision regarding the extent of reliance to invest in the appraiser’s assignment results for the subject property.


Proper disclosure makes the assignment results meaningful to the client as is required by STANDARD 8. Failing to make a competency disclosure when required would be misleading. It would be a serious violation of USPAP to offer a value opinion that may lead the client to believe that the assignment results are worthy of belief when even the appraiser doubts the credibility of their his or her own opinions or analyses.


A proper and early competency disclosure to the client is important. The client can then discuss the problem and evaluate the appraiser’s proposed remedy. The COMPETENCY RULE requires that the remedy be described in the report. The description of how the appraiser solved the problem in the report should arm the client with sufficient information to determine whether or not to rely upon the appraiser, or whether, instead, to seek an alternative solution. The report must be meaningful, credible and answer the client’s question posed to the appraiser at the time of the assignment. Anything that could limit the client’s reliance should be disclosed.
 
What if the Signing Appraiser’s Reliance upon Another Individual is Total?

What USPAP requirements apply when the signing appraiser did not develop the value opinion regarding the subject property, but merely accepted the opinion of another expert? What are the appraiser’s responsibilities when the appraiser merely incorporates another appraiser’s assignment results into their report?

The Comment to Standards Rule 8-3 helps answer these questions:


When a signing appraiser(s) has relied on work done by appraisers and others who do not sign the certification, the signing appraiser is responsible for the decision to rely on their work. The signing appraiser(s) is required to have a reasonable basis for believing that those individuals performing the work are competent. The signing appraiser(s) also must have no reason to doubt that the work of those individuals is credible.
 
John S. Brenan, Director of Research and Technical Issues at the Appraisal Foundation wrote to this author that:

…the appraiser must have some competency to “have a reasonable basis for believing that those individuals performing the work are competent” and “have no reason to doubt that the work of those individuals is credible.”

Remember, the SCOPE OF WORK RULE states that:


The report must contain sufficient information to allow intended users to understand the scope of work performed…because clients and other intended users rely on the assignment results. Sufficient information also includes disclosure of research and analyses performed.

When reliance on another appraiser’s opinion is total, it would be necessary, in the author’s opinion, to disclose in the report the following:


•    That the signing appraiser did not develop the assignment results for the specified properties, but merely incorporated the assisting appraiser’s opinions into the assignment report.
•    That the assignment results provided by the assisting appraiser were assumed to be credible.
•    The name of any appraiser providing significant personal property appraisal assistance must be stated in the appraiser’s signed certification statement.
•    The assistance provided must be described in the report’s scope of work.

Section Three: Real World Examples

The following is a hypothetical case study excerpted from an Online USPAP Update Course written by the author and offered at AppraisalCourseAssociates.com


A Firearms Example


John Morgan, a hypothetical generalist personal property appraiser, is asked to appraise the contents of a home for equitable distribution purposes. While inspecting the contents, John discovered some 20th century firearms that appeared to be ordinary examples with which he has had some experience. John decides that his knowledge and experience is consistent with, or even exceeds, that of the typical market participant; however, John also knows that he is not a firearms expert.


During his inspection, John identifies the firearms and their relevant characteristics (model, maker, finish, size, condition and features such as engraving, checkering, and attached telescopic sights, etc.) Using his typical appraisal techniques and methodology, John finds and analyzes comparable sales of firearms made by the same maker, with the same model numbers, and with the same or similar characteristics. John then develops his final value opinions using the sales comparison approach to value. Some firearms had limited data so John is left with some uncertainty regarding a couple of the firearms.


To confirm his opinion, to exercise due diligence and to put his “uncertainty” to rest, John contacts a specialist firearms appraiser/dealer with whom John has consulted with in the past. John hopes that the expert will either confirm John’s opinions of value or point out shortcomings in John’s identification or in his analysis of the market data regarding the firearms. Simply put, John wants to confirm that his assignment results are credible.


The consultant reviews John’s firearm descriptions, value opinions and photographs. He reports that he does not think John has overlooked any significant facts or market-related issues relating to the firearms. Having this input, John feels confident that his value conclusions regarding the firearms are credible and he proceeds with completing the assignment.


In this scenario, John complied with the requirements of USPAP and developed credible assignment results without feeling a need to make a competency disclosure.


Would the services provided by the gun appraiser specialist be considered as “significant appraisal assistance”? If so, then the individual would have to be identified in the report’s certification statement. The answer is “No”. This assistance would not be considered “significant,” so John would not be required to identify the consultant appraiser in the report’s certification.

What is “significant appraisal assistance?”


Though USPAP does not define “significant appraisal assistance,” there is an important discussion provided in 2010-2011 USPAP’s FAQ 219 which states that in order to be considered as significant appraisal assistance:


“the contribution must be of substance to the development of the assignment results. In other words, the individual must contribute to the valuation analysis in a noteworthy way.”

In the above scenario, the consultant’s comment that “he saw no facts or market issues of significance that were overlooked” did not constitute significant appraisal assistance.


What if, however, in the above example the firearms appraiser had said?:


“Gun #1 is a rare prototype of an important gun that was released as Model #XXX the following year. It is a very sought-after collectible gun.”

Would this assistance be considered “significant”? Would it impact the content of the certification statement? The answer to both questions is “Yes”!


The assistance was “significant appraisal assistance” because it was provided by an individual acting as, or expected to act as, an appraiser. Furthermore such assistance would be regarded as significant appraisal assistance since it was “noteworthy” and would impact the appraiser’s opinion of value. The expert’s report, in this new scenario would have contributed substantially to the development of the appraiser’s final value conclusion, and would have caused John to expand his scope of work and do additional research and analysis based upon this new information.


Since the comments provided would amount to “significant appraisal assistance,” John would be required to identify the firearms appraiser in the certification and to disclose the extent of the assistance provided within the appraisal report.


Would the assisting appraiser be required to establish a workfile in regard to the consultation? “No.” Even though his opinion plays an important role in John’s appraisal, the firearms appraiser’s assistance did not constitute an “appraisal” since he did not offer an opinion of value. Nor can the assistance be considered an “appraisal review.” As a result, the comments would not cause there to be a workfile requirement for the specialist firearms appraiser.


By the way, though the above scenario involved an appraiser offering significant assistance, it should be noted that significant assistance could also be provided by non-appraisers. For instance, the above opinion could have been offered by a gun or pawnshop dealer or auctioneer who is not an “appraiser.” Such non-appraisers who offer assistance are not identified in the appraiser’s certification statement (since USPAP and the certification applies only to “appraisers”); however, the extent of their assistance should be disclosed in the report as required by the SCOPE OF WORK RULE and STANDARD 8.


In neither of the above two firearm scenarios did generalist appraiser John Morgan feel compelled to make a competency disclosure to the client, and in both scenarios John ultimately did develop credible assignment results. Thus John performed competently and did not violate USPAP.


It should be noted however that if John had not consulted with the expert that John would not have developed credible assignment results and consequently it could be demonstrated that John violated USPAP in several regards. .


A Japanese Hanging Scroll (Kakemono) Example


This same hypothetical assignment also included a Japanese 20th century kakemono (a hanging Japanese scroll painting) stored in its original box.


John again decided against making a competency disclosure and proceeded to develop his own opinion of value for the scroll painting. Upon completion of the development of his value opinion of this object, John consulted with an Asian arts expert to confirm his opinions.

The Asian arts expert reviewed the comparable sales used by John and informed John that the properties on which he had based his opinions of value were not comparable to the subject property. The comparable properties John had analyzed were of higher-quality and more sought-after by collectors, whereas the subject property was a common, decorative, tourist-quality kakemono. As a consequence, in the expert’s opinion, John’s value conclusions were too high. Upon reconsideration, John agreed.


John and the consultant subsequently researched and found comparable sales that were of ordinary and decorative examples. Based on these new comparable sales, John lowered his value opinion and ultimately developed credible assignment results.


Let us review. In one of the firearm scenarios, John encountered a rare and valuable prototype firearm originally identified and valued as common and ordinary. In this case John failed to properly identify the property and its relevant characteristic, but the expert caught the mistake for John. In the second scenario, John’s analysis of the kakemono inappropriately considered high-quality comparables when, in fact, the subject property was actually common and ordinary. Again the expert consultant caught the mistake.


In both examples, had John not consulted with an expert, his knowledge and experience would have been deficient. He would not have recognized his errors. Due diligence helps protect appraisers from significant errors and appraisal users from possible harm from such shortcomings in an appraiser’s knowledge and experience.


Generalist personal property appraisers are constantly exposed to appraisal challenges. They must be generally knowledgeable regarding the common and less-valuable types of property that are typically found when appraising complete households. But the generalist appraiser must also be careful to recognize and identify the rare, uncommon, and often very valuable objects as well. This ability to discern the difference is usually based upon connoisseurship as well as years of study, research, and market knowledge and experience. Due diligence is always important. Competency is always required. Beginning appraiser must take caution, consult frequently and make a competency disclosure whenever they have doubt.


The challenge is daunting.

A USPAP Q&A Summarizes Some Issues

The following June 2009 Appraisal Standards Board (ASB) Q&A addresses the following issues:

•    Assignment conditions,
•    Scope of work acceptability, and
•    Geographic competency

The Q&A involves a real property appraiser who does not have the time to become familiar with a geographically-distant market area. It demonstrates how the COMPETENCY RULE and the SCOPE OF WORK RULE apply during an assignment and how other parts of USPAP are also relevant to opinion development and competency.


Question: Often, I am asked to perform an appraisal assignment outside the areas I am most familiar with. The assignments come with a requirement that a completed report be submitted within 48 hours or less. This time frame does not permit me to adequately research the subject property market. Is it permissible for me to accept an assignment under these conditions?


The ASB provided the following guidance:


The COMPETENCY RULE in USPAP requires an appraiser to notify the client that he or she does not have the necessary competency to complete an assignment prior to accepting the assignment. Because your statement in the question states that the “time frame does not permit me to adequately research the subject property market,” you have already made the determination that becoming geographically competent for this assignment is a concern. The client must be notified, appropriate steps must be taken to become competent, and the lack of competency, plus the steps taken to become competent, must be disclosed in the assignment report.


If an appraiser is not in a position to spend the necessary time in a market area to attain geographic competency, affiliation with a qualified local appraiser may be an appropriate response to ensure development of credible assignment results. Alternatively, the appraiser must decline the assignment.


This situation is also addressed by the SCOPE OF WORK RULE in USPAP.

For each appraisal, appraisal review, and appraisal consulting assignment, an appraiser must:


1. identify the problem to be solved;
2. determine and perform the scope of work necessary to develop credible assignment results; and
3. disclose the scope of work in the report. (Bold added for emphasis)

Scope of work is defined as the type and extent of research and analyses in an assignment. If you know that the required time frame does not permit you to adequately research the subject property market in order to complete the scope of work necessary to develop credible assignment results, you should decline the assignment.


In some situations, you may initially believe that you can complete the scope of work necessary to develop credible assignment results, but subsequently determine you are unable to do so and still comply with the specific time frame. This circumstance is specifically covered in the Scope of Work Acceptability section of the SCOPE OF WORK RULE.


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.


Comment: If relevant information is not available because of assignment conditions that limit research opportunities (such as conditions that place limitations on inspection or information gathering), an appraiser must withdraw from the assignment unless the appraiser can:


•    modify the assignment conditions to expand the scope of work to include gathering the information; or

•    use an extraordinary assumption about such information, if credible assignment results can still be developed.

Conclusions

This paper reviewed USPAP parts, rules and requirements that address appraiser competency. It explored various scenarios regarding when an appraiser’s knowledge and experience is sufficient to proceed without making a competency disclosure to the client.

Generalist personal property appraisers are often able to competently identify many property types and their relevant property characteristics, judge quality, and evaluate condition and alterations. Having done so, they are then in a good position to evaluate market acceptability and the market’s response to the particular characteristics of the subject property sufficiently to develop credible assignment results. In such circumstances no competency disclosure need be made. 

However, merely having market and object knowledge and experience is not sufficient. The appraiser must also be competent to:
•    Identify the problem
•    Evaluate and determine that they are competent to determine the scope of work
•    Understand and employ the necessary appraisal methods and techniques
•    Evaluate and disclose relevant assignment conditions
•    Develop and report credible assignment results
•    Comply with all applicable international, federal, state and local laws and regulations
•    Identify geographical factors that impact value

The appraiser must perform all of the above competently, and more. They must act ethically, and must comply with all applicable requirements of USPAP in every assignment

This paper focused on answering the question: “Does limited appraiser knowledge and experience require a competency disclosure?” It also explored how to recognize when the appraiser should make a competency disclosure. Part of the answer to the above questions is based on the answer to the question: “Which Rule Rules?” This paper also emphasized that unresolved uncertainty regarding the credibility of an opinion is an indicator that it is time to:

•    Do additional research and/or obtain assistance from others, or
•    Make a competency disclosure that the appraiser could not complete the appraisal of an object as expected, and then retain an expert who can complete the assignment competently, or
•    Decline to appraise the property

The appraisal of complete residential contents containing many different types of personal property will sooner or later test any appraiser’s competency. In each new assignment, the types of personal property and their relevant property characteristics differ.

USPAP always, without exception, requires the appraiser, for every subject property, to do whatever is necessary to develop credible assignment results that are relevant to the intended use of the report. Accomplishing this requires the appraiser to evaluate whether or not he or she has the requisite knowledge and experience to complete the assignment competently. In order for the client and other intended users to feel comfortable relying on an appraiser’s assignment results, they must have confidence in the appraiser’s knowledge of and experience with the subject property.

The question that the appraiser must ultimately ask at the conclusion of an assignment is:

“Can I represent that the appraisal assignment results, as developed and reported, are meaningful, relevant to intended use, and worthy of belief?”

Experienced residential contents appraisers face this question repeatedly. In the end, however, they must always be able to answer, “Yes.”

 


Copyright 2012