Third Exposure for USPAP changes expected

[George Hatch]

Steven,

The term "Scope of Work" and it's inclusion in USPAP may be recent, but the elements that encompass it are not. Under the definition of Scope of Work, there are the following:

"The degree to which the property is inspected or identified;

the extent of research into physical or economic factors that affect the property;

the extent of the data research; and

the type and extent of analysis applied to arrive at opinions or conclusions."


The use of these elements in defining the end result is also not new.


In using the term scope of work, we are merely recognizing that not all situations require the same degree of research, or analysis, or reporting. Were it not so we would all be required to render full-blown appraisals in self-contained formats for every single assignment, with no exceptions. Or they would still be making billion dollar loans based on a verbal from the appraisers' assistant. In fact, in using the term Scope of Work, we have dispensed with the fiction that an appraisal and appraisal report that is going on front of a court is not going to have different requirements for due diligence (at least in documentation, if not in research) than one going into a file to support a line of credit decision.

But one could not know whether that opinion was adequate or appropriate to the clients intended use."

Why? Does Market Value vary with Intended Use?

Surely, when you referenced this passage and asked your question you were aware of the distinction between an assignment and an appraisal. Surely you recognize that an appraisal and appraisal report prepared under the definition of "Market Value" could be accurate yet wholly unsuitable and incorrect if the intended use did not involve the definition of market value, or the intended user required a different definition of value. Surely you recognize that an appraisal and appraisal report can be based on market value but still be unsuitable if the wrong format is used in relation to the client's intended use?

Client says, "Sure, it's a Market Value appraisal and report, but I only needed a Limited Appraisal and a Restricted Use Report, not a Complete Appraisal and a Self-Contained Report". Are we really serving our clients professionally by building and selling Caddillacs when what they really need is a Chevy? Or maybe a good, clean, used VW Bug?

So no, the definition of Market Value may not change, but the client's needs might not include that definition. The definition of due diligence doesn't change but the elements that define the adequacy of that due diligence will vary according to the user and the use. If Scope of Work as an appraisal concept is totally new (which I don't think it is), then it still represents a step forward because it allows us to better define our product and limit our exposure in cases where communication between appraiser and client is an issue. Which I reckon is pretty much all the time.

So in closing, I don't think that who the intended user is or what their needs are have any affect on the value of a property. But they will have an affect on which definition of value the appraiser uses, how an appraiser performs the appraisal, and how they report it.

George Hatch

 

[Austin]

George: No wonder 37% of students flunk the USPAP instructor’s class. That discussion is abstract and artsy. You should run for congress. Having served on two church constitution review committees and having been appointed the one to put the ideas into words, I would give the writers of USPAP an F grade.
If I was writing USPAP and the subject was what you just addressed, the first thing I would do is clearly and straightforwardly lay out the problem I was trying to address and then address the problem with a suggested solution. The way they have gone about it, it appears to me, is to hide the problem they are trying to solve and with abstract language, that very few understand, then make a vague attempt to remedy the problem.
I don’t know but it appears to me after reading some of the above posts about scope, intended use, etc., that the writers of USPAP are attempting to liberate appraisers from the straightjacket that former versions of USPAP strapped them into. For example, scope of appraisal in my mind is appraiser specific. If you came into my hometown and tried to appraise an apartment complex for example, your scope of work would be much broader than my scope of work if I did the same assignment. Why? The answer is that my scope includes the past history of this area including appraising most large apartment complexes in the city over the last ten years. I don’t need to do rent surveys, expense analyses, etc., because I like all other appraisers do in their practice keep data bases and running tallies of what is happening which constitutes an historical scope that all appraisers carry around in their head.
Every appraiser has an area in which he/she does a lot of work and thus carries around a vast amount of information in their head that constitutes their historical scope or experience that previous versions of USPAP have completely ignored. Appraisers don’t need to use three approaches to value to appraise a 1,000 sf brick rancher home for the 200th time this year. In my view, that is what the writers are trying to recognize by giving the appraisal community the freedom to use their historical scope. They just don’t want to come out and say it in plain language because to do so flies in the face of, or better still, points out the silliness of former versions of USPAP that completely ignored realty by assuming historical scope did not even exist.
It is always difficult to reform yourself when you have gone over board. Vanity will not allow for any person or group to say: “Darn. We really screwed things up good fashion so now we are going to make things right.” Things just don’t happen that way in the real world. Pride, vanity, love of money, and a lust for power will not let it happen.

 

[bradellis]

Steven,

Mornin, dude. OK, some examples:

Assignment 1: I got a guy who wants to buy an new car- home is paid off. Is it worth more or less than $75K? Just pull up the public record, look at some comps and tell me if the Market Value would be higher or lower.

OK, higher. This is an adequate scope of work for the loan to buy the GMC Jimmy. Higher.

Assignment 2: Sorry, man, when the guy saw our low rates, he has decided to refi. 65% LTV cash out. DU say a drive by is adequate.

OK, I drove by. Looks OK from the outside and appears to match what public records has. Here is my 2055. Value opinion- $78K.

Assigment 3: UH oh, now the guy wants to do a 95% LTV and do some remodeling. Can you do me a full blown 1004?

Sure. But when I got inside, I found out why he wants to "remodel"! Kitchen is gutted and so is the bath. Floor coverings are gone and he removed the wall between the 2nd and 3rd bedrooms- so now it is a two bedroom.

Opinion of value, as is, $60,000, as completed $90,000- even as a two bedroom. Here's my report. Note the as is value on page two and the as complted value in the addendum.

Client- thanks, I'll handle it from here.

All 3 opinions are credible given the scope defined by the client and the intended use- even though the interior inspected opinion is way lower.

Why, because the client understood the limitations he placed upon you in each assignment. Matters not that subsequent info that you could not have known at first now tells you that the value is lower. The first two obviously involve extraordinary assumptions about the condition of the propert whereas the third does not necessarily involve the EA.

Brad Ellis, IFA, RAA

 

[Fred]

George,
You are reading many things into my post that were not there to begin with.

You write, "But they [intended use] will have an affect on which definition of value the appraiser uses, how an appraiser performs the appraisal, and how they report it."
Yes. That is traditional purpose-driven process. Hold everything else the same: the property, the appraiser, the date, etc. and change the purpose (definition of value) and the results will likely change. In your statement, the intended use and purpose (standard of value) BOTH changed.

The instructors manual, however, is advocating something different, where changing the intended use WITH”OUT changing the purpose (standard of value) causes results to vary. The ingredients of the illustration are – one appraiser, one property, three appraisals, three intended uses, NO indicated change in purpose (standard of value) = three different results.
Appraisal 1 - DeskTop
Appraisal 2 - Driveby
Appraisal 3- Interior Inspection
Three intended uses created three scopes of work, which lead to three different results - but not change in purpose (to find market value).

You also write, "I don't think that who the intended user is or what their needs are have any affect on the value of a property."
Agreed, the value does not change. However, as the above-cited illustrations shows, the instructors are being taught that the value as found and reported by an appraiser would change with intended use, based on what both you and the instructor's manual call "client's needs." (Hmm).

George, remember the narrow point I was making to Mike in my last post? – that Mike was not just seeing the standards of practice in a new light, but that these were new standards of practice. American appraisal literature describes purpose-driven appraisal process going back to Babcock's, The Appraisal of Real Estate (1924). In describing the new scope-of-work USPAP re-write, the instructors Manual page 88, says:
<span style='color:darkblue'>"Furthermore, once it was discovered that the essential aspects of the development process are driven by the same concept of intended use,"</span>(or just invented) a new view that is a departure from most of recorded appraisal thought and this is part of the reason the course material is confusing experienced USPAP instructors.

As far as I know, the instructors manual is the place where the AF has come the closest to indicating that USPAP and the traditional view of standards was changed; to the extent saying that they discovered that everyone was mistaken is the same thing as announcing that there is a New USPAP.

 

[Fred]

Brad,
Would I be right if I infer from your post that you agree with me that we have new standards, not just the old standards in a new light?

 

[George Hatch]

Steven,

I am no scholar and can lay no claim to being conversant on the history of appraisal theory and how the current version of USPAP relates to it. I'll leave this type of analysis to others more qualified, which I assume includes you.

Instead, let me say that common appraisal practice as it appears at the street level has been in a constant state of evolution since before I got into the game, and I suspect it will continue to move in perpetuity. Whether the directions taken so far represent forward motion or backwards motion I think will depend on a person's point of view. You have alluded to the concept that the original version of USPAP as promulgated by The Appraisal Foundation had some fatal flaws. I have heard others speak on this subject and cannot but agree that in reacting to the S&L crisis and the perceived role appraisers had in it, USPAP was built or at least modified to provide a plan of battle for a profession under seige. In hindsight, it could have been built differently, and maybe it should have been.

I took a condemnation course last year with Mr. George Harrison, with whom I'm sure you are familiar. He has spoken quite convincingly, and I agree to a large extent, that USPAP was built backwards. When they built USPAP, they laid out requirements for everything they could think of and told us that the entire sum represents an appraisal, with correspnding requirements for the other modes of valuation practice. There were binding requirements that applied all the time and specific guidelines that applied most of the time. They tried to clarify it in 1994 but instead made it even more cluttered by developing stringent and rigid parameters for each product, further reducing our options. Up until recently we had a situation where an appraisal was considered to be complete only when everything, everything, everything was included, and anything less than that was called a limited appraisal, with the appropriate warnings attached. USPAP has become a standard that is defined from the top (or most comprehensive service we can offer) down.


Maybe, as Mr. Harrison and others have suggested, USPAP should have been built from the bottom (binding requirements that apply to every appraisal service, no matter what) up, with any additional requirements being dependent on who the intended user is and what they want to do with it. For the benefit of others reading this thread (as I know you understand the direction I'm going), let's say the appraiser is engaged to develop an SFR appraisal for a loan. In addition to the omni-present binding requirements (personal conduct, competence, identifying the property interest to be appraised, etc), this appraisal assignment would also be subject to other requirements specific to the intended user and intended use. An example of these supplemental or specific requirements would be the Fannie Guidelines or HUDs handbook. In this way, an appraisal developed for this type of user and this type of use could be tailored to fit these needs while not wasting time, money and effort for either the appraiser or the client in filling needs they don't have. Same thing for litigation appraisals, or condemnation, or taxation or any other type or user and use. It seems to me that the recent changes to USPAP are geared in this direction.

Regardless of how USPAP could have been built or the direction that The Appraisal Foundation is apparently steering for right now, we are still left with the current version of USPAP, which everyone will still agree, remains imperfect and in need of some help. The biggest complaints appraisers and users have about the USPAP is that it is hard to understand, overly technical yet too ambiguous at the same time, and most of all, represents yet another set of rules to a society that yearns for unbridled freedom. How to respond to all of these concerns at the same time? The answer, of course, is that they cannot all prevail.

As always, we must choose a single path and follow it. At this point, the USPAP is recognized by everyone to have some problems, the big question is how to address them. We must remember that the individuals who now sit on the ASB are not responsible for most of these problems because they weren't around when it was developed. They inherited it from their predecessors, who were laboring under somewhat different circumstances and trying to address somewhat different issues. Instead, the members of the current ASB are responsible for the changes that they are making in the present. Are they going to try some new things? It looks that way. Will everything they try work out as intended? Probably not. Will we be able to live with what they're doing? Most likely, and those things that develop into too big a problem can be easily changed as necessary. The thing is that they aren't working in secret; they solicit feedback and make their decisions, even when that decision is to delay change to study the problem some more, only after reconciling the input they have received. You are familiar with how all this works.


As I stated in another post, we should not be afraid of changes made for the purpose of making our position stronger, so long as we can come to an understanding of what those changes are and how we can make them work for us to our best advantage.


George Hatch

 

[Fred]

George,
What a darn thoughtful response.

I was focusing on the narrow point that the USPAP originally defined one view of standards of practice and now defines another; and how that change were largely unannounced and even today the changes are still unrecognized by many would-be USPAP instructors.

This is not scholarly history. Pre-1999 USPAP SR 1-2a and 2-2a iii say identify and report purpose and intended use. Purpose always came first because intended use, as we have agreed, should not cause the value to change. The 2002 USPAP shows intended use first with its own separate rule and comment.

Familiar with George Harrison? No - Henry Harrison? Yes. - (Unless George is the deceased, former Beatle, composer of Something and Here Comes the Sun),

I find the 'USPAP built-backward or included-everything' theory not accurate or convincing. Remember, the Departure Provision was always in there! The original USPAP was not made from whole cloth, but was based on prior codes of conduct. SR 4 was verbatim from the Institute. I have enjoyed finding fault with USPAP for years, but do not see the "fatal" flaw with the original. Correctly employing recognized methods is a performance standard for everyone who has a job. Why some folks have trouble understanding that is a mystery to me. These are standards not a recipe book. If USPAP were about cooking instead, it would say that you must employ the correct methods necessary to make good food. What is so complicated about that? I would add that one must understand the "PAP", before one can understand the "US." (Think about that one). As far as include-everything, I have not included a cost approach in a market value appraisal for some time and it never crossed by mind that the appraisal was not complete. The always-apply-three-approaches-to-everything school of thought caused appraisers to read requirements into USPAP that were never there. See what I mean by the understanding of "PAP," driving the understanding the "US."

The mantra of the New USPAP Instructors is this "tailoring" the assignment to the intended use and not filling needs the client does not have. This sounds OK if you say it fast, but there a problems. I am not necessarily saying that the appraisers should reject the New USPAP, but that the lack of exposure and open debate has resulted in the ASB and its trainees telling everyone what the benefits are, but there is little dentifying and analyzing the costs.

The Old USPAP SR 1-1b contained a fixed a minimum standard for scope of work. Work had to be sufficiently diligent to ensure that the data that would have a significant affect on value were considered (identified and analyzed). A certain level of reliability of results is implied in this (and was explicit in SMT-7). In New USPAP, sufficient diligence is contingent on a flexible scope of work identified by individual appraisers - and the appraiser can define the necessary scope of diligence as virtually zero. It is almost as if reliability and accuracy are something the client must order a la carte from the Supplemental Standards menu.

As Brad's post shows, what the Instructors will start teaching (and testing on) beginning next year, WITHOUT SAYING IT BLUNTLY, is that some types of users do not require reliable and accurate appraisals, so the scope of work necessary to create reliability and accuracy is irrelevant to the assignment. Consider your statement in that context,
"…an appraisal developed for this type of user and this type of use could be tailored to fit these needs while not wasting time, money and effort for either the appraiser or the client in filling needs they dont have."
I know that you are not consciously or deliberately advocating for bad work, but that is the New USPAP. I would also argue that the literature and standards do not include any exhortation to waste time, money and effort. In Old USPAP appraiser could pear back time and effort that was not necessary and not applicable and that did not nothing to eliminate significant error. In New USPAP appraiser can paer back time and effort to zero, becasue some intended users do not need reliable and accurate appraisals. (Perhpas this is to make appraisers more "competitive" with AVM's).

The problem that I see, George, is that the scope-of-work loophole is just as wide-open to the ideliberately-innacurate (made-as-instructed) appraisal as it is for these "intended users" and with "needs." In Brad's post, he gives an example where he says overlooking the defects were OK and "credible" per SR-1 - and he did not mention "complete." See what I am getting at? Anyone can play this game of overlooking things.

Thanks for the chat, George

 

[bradellis]

Steven,

In a manner of speaking, yes. By that I mean that, while USPAP itself has not undergone a major change since 1999, the way in which we interpret it certainly has- at least as regards how we go forward from this point.

In the end it may well all be semantics. For example, the word "cool" now carries a second meaning that was clearly never intended when the word was first developed. Same applies to the word "bad" in the 70's.

When bad really means good it can certainly be very confusing- especially if you are not cool enough to understand the difference caused by inflection!

Perhaps that is the case with USPAP- while the words may not have changed, the meaning certainly has.

And no, I would not care to argue that this has not changed USPAP. It clearly has- even if the words are the same.

Brad Ellis, IFA, RAA

 

[Fred]

Now hold on there, Brad.
Did you not recently tell me that a certain follicular challenge prevented you from splitting hairs with me?

I’ll just take your, yes, there is a New USPAP and build on that. If I were to stop and split hairs, though, I might respond to you interpretation that there has been no "major" revision to USPAP since 1999 by pointing out that the 2001 edition
-changed views banning advocacy in non-valuation work done by appraisers,
-split consulting into consulting and appraisal-consulting
-completely re-wrote all of SR’s 4 and 5
-created a niche of appraisal practice to which standards do not apply, and
-created home-made definitions of key terms including price, cost and value.