What are the steps in the appraisal process, and what are the key requirements of USPAP?

Valuation & Market Analysis on the Real Estate Exam

Understanding the appraisal process and USPAP requirements is essential for real estate professionals. Agents work with appraisers regularly and must understand how appraisals are conducted. Knowing USPAP standards helps agents respect the appraiser's independence, avoid actions that might compromise the appraisal, and understand why appraisers make certain decisions. Additionally, understanding state regulatory requirements for appraisers helps agents advise clients about the legitimacy of valuations and helps maintain professional relationships.

Understanding Valuation & Market Analysis: Key Concepts

What It Means

The appraisal process is a systematic series of steps that appraisers follow to develop a credible, defensible value conclusion. The process begins with accepting the assignment, during which the appraiser verifies that he or she is qualified to complete the assignment, discloses any conflicts of interest, and determines the scope of work. The appraiser then defines the appraisal problem by identifying the subject property, the type of value to be appraised (typically market value for mortgage purposes), the valuation date (the date as of which value is estimated), and the intended users of the appraisal (the lender, the borrower, etc.).

Next, the appraiser gathers and analyzes relevant data. This includes general data about the economic conditions and market trends in the area, and specific data about the subject property and comparable properties. The appraiser physically inspects the subject property, gathering detailed information about its characteristics, condition, and features. The appraiser then researches and selects appropriate comparable sales (or, for income property, comparable lease data or sales of similar income properties). The appraiser analyzes this data to understand market trends and typical adjustments for property differences.

The appraiser then applies one or more valuation approaches. For residential property, the sales comparison approach is typically primary, supported by the cost approach for newer construction. For income property, the income capitalization approach is primary. For special-purpose property or development land, the cost approach may be primary. The appraiser makes adjustments and calculations according to each approach and arrives at a value indication from each approach used.

How It Works

In the reconciliation step, the appraiser reviews the value conclusions from each approach and arrives at a single final estimate of value. This does not mean averaging the approaches; instead, the appraiser weighs each approach based on how appropriate it is for the subject property and the reliability of the data and assumptions. For a residential property with good comparable sales data, the sales comparison approach might receive the greatest weight. For new construction, the cost approach might receive more weight.

The appraiser then prepares a written report, typically a Uniform Residential Appraisal Report (URAR) for residential properties or a similar form for commercial property. The report documents the appraisal process, the data analyzed, the approaches used, the adjustments made, and the final value conclusion. The report includes photographs, property characteristics, comparable sale information, and the appraiser's reasoning.

USPAP (Uniform Standards of Professional Appraisal Practice) is a set of ethical and technical standards that govern appraisal practice nationwide. USPAP is promulgated by the Appraisal Standards Board of The Appraisal Foundation and is regularly updated. USPAP includes 10 Standards (ethical and technical) and supplemental standards addressing specific assignments.

Types and Categories

Key USPAP principles include: Appraiser competence and impartiality; the appraiser must be qualified to complete the assignment and must not allow bias or conflicts of interest to influence the appraisal. USPAP requires full disclosure of conflicts of interest and relationships that might affect the appraisal (for example, if the appraiser has a financial interest in the property). Objective and independent analysis; the appraiser must base conclusions on credible data and reasoning, not on the client's desired value or outcome. The appraiser must not allow pressure from the client, the lender, the seller, or other parties to compromise objectivity. Accurate reporting; the appraiser must report all material facts and assumptions and must not omit information that would affect the value conclusion. The appraiser must disclose the scope of the assignment and any limitations. Development and support of conclusions; all conclusions must be supported by reliable data, credible reasoning, and appropriate analysis. Assumptions and limiting conditions must be disclosed.

Valuation & Market Analysis Rules by State

Each state has its own rules when it comes to valuation & market analysis. Here are a few examples of how requirements differ: