As a real property appraiser, you rely on appraisal reports to communicate your opinion of value. It’s important to realize that forms are not reports. Filling out the form properly and completely does not always mean your report will be compliant with USPAP. The content of the appraisal report—not its form or format—determines its compliance. In this post, we break down the basic reporting requirements set forth in USPAP Standards Rule 2-1. The better your understanding of these reporting requirements, the better your ability to comply with USPAP.
What are the three basic reporting requirements?
USPAP Standards Rule (SR) 2-1 provides three basic, foundational requirements for real property appraisal reporting:
“Each written or oral real property appraisal report must:
(a) clearly and accurately set forth the appraisal in a manner that will not be misleading;
(b) contain sufficient information to enable the intended users of the appraisal to understand the report properly; and
(c) clearly and accurately disclose all assumptions, extraordinary assumptions, hypothetical conditions, and limiting conditions used in the assignment.”
Standards Rule 2-1 (a)
SR 2-1 (a) builds on the ETHICS RULE requirement that your reports must not be misleading. You can avoid being misleading in your appraisal reports by making sure that you “clearly and accurately set forth the appraisal.” As the saying goes, you must tell the truth, the whole truth, and nothing but the truth.
Standards Rule 2-1 (b)
SR 2-1 (b) states that you must provide your client and other intended users with enough information to understand the report. That requires you to communicate with clients “on their level,” and with consideration of the specific issues involved in the appraisal. Clients and intended users will require more or less information depending on many factors, including but not limited to:
- Their level of sophistication or experience with appraisals and appraisal reports
- The intended use of the appraisal and report
- Relevant property characteristics
- The complexity of the appraisal process
Just as the scope of work varies from assignment to assignment, the level of report detail also varies for different assignments. It is not necessary for the appraisal report to contain sufficient information so that anyone can understand it. USPAP only requires you to write the report with intended users in mind.
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Standards Rule 2-1 (c)
SR 2-1 (c) states that you must “clearly and accurately disclose all assumptions, extraordinary assumptions, hypothetical conditions, and limiting conditions used in the assignment.” While you are probably very familiar with limiting conditions, such as those standard limiting conditions found in the various Fannie Mae forms, you may benefit from a brief review of assumptions, extraordinary assumptions, and hypothetical conditions.
What are assumptions, extraordinary assumptions, and hypothetical conditions?
There used to be a USPAP definition for assumption, but it was deleted in 2018, as the Appraisal Standards Board decided its use is not intended to differ from the general English meaning of the word. Assumptions (sometimes called “ordinary assumptions” or “standard assumptions”) are made in virtually every appraisal assignment.
As per Standards Rule 2-1 (c), even ordinary assumptions need to be disclosed. Examples of common assumptions in real property appraisal reports include:
- I assume property’s title is good and marketable, and will render no opinions about the quality of the title.
- I assume there are no hidden or unapparent conditions of the soil or subsoil that would render it more or less valuable.
USPAP defines the term extraordinary assumption as: “an assumption, as of the effective date, which, if found to be false, could alter the appraiser’s opinions or conclusions.” While an “ordinary” assumption may be made in virtually every appraisal assignment, an “extraordinary” assumption is directly related to a specific assignment. If you were to later discover that the extraordinary assumption is actually not true, then your value opinion could be impacted or changed as a result. This is what makes it extraordinary, because it is directly relevant to your appraisal or value opinion.
SR 2-1(c) requires that all extraordinary assumptions be disclosed clearly and accurately. For instance, if you were to appraise a home with a small crack in the foundation, you may implement an extraordinary assumption that the home is structurally sound. You would be required to disclose the use of the extraordinary assumption and also state that its use might have affected the assignment results.
USPAP defines hypothetical condition as: “a condition, directly related to a specific assignment, which is contrary to what is known by the appraiser to exist on the effective date of the assignment results, but is used for the purpose of analysis.”
A good example of utilizing a hypothetical condition in the appraisal process is the appraisal of a property with proposed improvements as of a current effective date. Whenever you appraise a home that is not yet built, for instance, you know with full certainty that the improvements simply do not exist as of the effective date of the appraisal, and yet the appraised value of the property reflects the completed improvements.
Typically (and correctly) the appraiser will disclose that the appraised value is “subject to completion per plans and specifications.” This is good, but not good enough. Additional language is required to clearly disclose the hypothetical condition. For example, you might state, “the appraised value is subject to completion of the improvements per plans and specifications, based upon the hypothetical condition that the improvements were complete as of the effective date.” You would also need to state that the use of the hypothetical condition may have affected the assignment results.
For related info, check out our course, Residential Report Writing: More than Forms.
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