Monday , 11 December 2017

Do Third Party Inspectors Violate USPAP

This article is an excerpt from an article first published HERE. If you would like to read more from Dustin please visit TheAppraiserCoach.com.

It was recently brought to my attention, by a reputable appraiser I might add, that the use of third-party inspectors may be a violation of USPAP. Or more specifically, that an appraiser relying on a third-party inspector for information (without knowing their name), may be a violation of USPAP. For example, there are several (and growing) companies who are providing clients with what are being postulated as “hybrid appraisals” or “hybrid reports.” The definition, as far as I can discern, is that a third party inspector ‘inspects’ the property (usually an exterior from the street – which is why there are quotation marks) and a desktop valuation is performed by a licensed or certified appraiser based on the data provided from the drive-by information. It is my contention that the outlined scenario does not violate USPAP – as long as the appraiser takes care not to mislead.

Let me begin by stating what this article is not. This is not a discussion on the validity or prudence of this type of product. The profession is charged with strong opinions on both sides of the spectrum regarding ‘hybrid appraisals,’ ‘alternative valuations,’ ‘evaluations,’ ‘desktop appraisals’ and the like. I have my opinions on the matter as well, but that is a conversation for another day. My purpose in this article is to attempt to answer the question, “Does the use of third-party inspectors violate USPAP?”

As you all know (because we all keep up on USPAP – right?), we are required in Standard 2 to disclose any significant assistance. “When any portion of the work involves significant real property appraisal assistance, the appraiser must describe the extent of that assistance. The signing appraiser must also state the name(s) of those providing the significant real property appraisal assistance in the certification, in accordance with Standards Rule 2-3” (USPAP 2018-19 Lines 707-709). The questions are “what is significant, how do you disclose it, and where?”

In order to answer the three questions above, our best resource appears to currently be the non-binding FAQ section under #255 (in the 2018-19 USPAP). This FAQ makes it clear that significant assistance does not include data-entry and other, non-analytical work. “An individual who merely collects or provides data for use in the analysis does not provide significant appraisal assistance” (USPAP 2018-19 FAQ 255). In other words, when my assistant pulls county data on a subject property and types the parcel number and legal description into the report for me, she is not performing ‘significant’ assistance and does not need to be identified in the report.

What is significant is appraisal-related work (sometimes referred to as “Tier III” activities). They are outlined in the FAQ referenced above as “the contribution…of substance to the development of the assignment results. In other words, the individual must contribute to the valuation analysis in a noteworthy way” (ibid). USPAP even goes on to describe the specific work that is considered to be worthy of a statement. “Examples of contributions made by appraisers that constitute significant real property appraisal assistance include the identification of comparable properties and data, inspection of the subject property and comparables, estimating accrued depreciation, or forecasting income and expenses” (ibid).  Using this definition alone, one would be led to believe that a third-party inspector should be identified in the certifications. Or, should he/she?

USPAP is clear that “one misconception is that non-appraisers who provide assistance should be identified in the certification. This is incorrect because the certification requirements in USPAP apply only to appraisers. Thus, only appraisers sign the certification or are identified as providing significant appraisal assistance” (USPAP 2018-19 FAQ 255, emphasis mine). If it is only appraisers who are to be named in the certification, the antithesis must also be true; non-appraisers do not need to be, nor should they be named in the certification. Indeed, the FAQ goes on to say, “the use of an environmental expert to determine wetland boundaries would not be considered significant real property appraisal assistance” (ibid). Just as an environmental engineer is not considered an appraiser, nor are they providing ‘appraisal assistance,’ a drive-by of the subject, snapping a few photos, and even making a few comments about observations made can hardly be considered significant appraisal assistance. Rather, they are providing data to the appraiser who will actually perform Tier III analyzing, comparing, and reconciliation – or in other words, appraisal work!

If we truly are to identify every source of information we rely on in the report by name, shouldn’t we also provide the names of the county clerk who provided us with the deeds, the assistant in the map department who emailed us a copy of the plat, the assessor’s assistant who gave us the owner’s name, parcel number, and legal description, and more? In other words, I believe the ASB sees the potential ridiculousness that would domino if a requirement to provide the name, title, and assistance given of every person who assisted in the appraisal process. Keeping it to ‘appraisers’ seems prudent.

So, what about non-appraisers helping out with Tier III responsibilities?  By that, I mean appraisal-type-stuff; like market studies, pulling comps, making adjustments, reconciling and the like; you know, things that require analyzation skills. I know more than one appraiser who employs ex-appraisers, ‘trainees’ without official license, or other experts to assist with appraisal related duties. Naturally, the liability falls squarely on the shoulders of the signing appraiser in these cases, but how do you handle disclosure? If this describes you, here is how I suggest you handle it based on FAQ 255. If a non-licensed appraiser were to assist you in any Tier III work, I would put their names and what they did on the report (perhaps in the addendum) and leave it off the certification (remember, USPAP is clear that the certification is ONLY for appraisers). It seems to me that this fulfills both the responsibility to disclose and also to not be misleading. Speaking specifically of trainees (who I guess are considered ‘appraisers’), USPAP states, “the name of the trainee appraiser who provided significant assistance, but does not sign the certification, must be stated in the certification. It is not required that the description of the assistance appear in the certification, but the extent of the assistance must be set forth in the report as required in STANDARDS 2, 4, 6, 8 and 10. The degree of this description is identified by the applicable reporting option for the assignment. For example, in an Appraisal Report the extent of the significant assistance must be summarized (USPAP 2018-19 lines 109-113). The most recent Fannie Mae Selling Guide does not seem to dispute this. “As noted in the License and Certification section in this topic, Fannie Mae allows an unlicensed or uncertified appraiser, or trainee (or other similar classification) that works as an employee or subcontractor of a licensed or certified appraiser, to perform a significant amount of the appraisal (or the entire appraisal if he or she is qualified to do so), as long as the appraisal report is signed by a licensed or certified supervisory or review appraiser and is acceptable under state law” (p. 519).

Does that mean an appraiser should not say anything about the third-party inspector, if his/her data was relied upon? I don’t believe that is a good appraisal practice either. USPAP is clear that an appraiser should not be misleading. Therefore, it would be best, in my opinion, to indicate where the data came from and make an assumption that it is true and correct; just don’t do it on the certification page. A simple statement like the following might suffice:

“This appraisal report is based on information obtained from a third-party inspector who completed a drive-by and took photos from the public road. I am relying on this information (in addition to other data as outlined) to discern information about the subject property for such features as quality, condition, and any amenities that may be revealed from this third-party inspector. I am making an assumption that my conclusions from this data are true and correct.”

Why do I care? I have spent the better part of the last half decade trying to help appraisers to think more like business owners and less like simple technicians. Many have chosen, rightly or wrongly, to not do any type of desktop or ‘hybrid’ appraisal work. I respect that business decision. However, for those who have chosen to incorporate this type of work into their business model, I believe it is important to understand what USPAP says (and doesn’t say) about it. In the end, it is not the report that is USPAP compatible or not; it is the appraiser!  You, and you alone, are responsible for making sure you are fully understanding and complying with your state laws and the Uniform Standards of Professional Appraisal Practice.

Have any comments or would you like to submit content of your own? Email comments@appraisalbuzz.com

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About Dustin Harris

Dustin Harris
Dustin Harris is a successful, self-employed, residential real estate appraiser. He has been appraising for nearly two decades. He is the owner and President of Appraisal Precision and Consulting Group, Inc., and is a popular author, speaker and consultant. He also owns and operates The Appraiser Coach where he personally advises and mentors other appraisers helping them to also run successful appraisal companies and increase their net worth. His free podcast can be listened to on iTunes and Stitcher. He and his wife reside in Idaho with their four children. He loves playing in the outdoors and watching movies indoors.

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