Real property valuation
The valuation of real property is one of the most fundamental activities in the real estate business. Its role is particularly critical in the transfer of real property, since the value of a parcel establishes the general price range for the principal parties to negotiate.
- tax benefits
Ownership of real estate produces income when there are leases on the land, the improvements, or on air, surface, or subsurface rights. Such income is part of real estate value because an investor will pay money to buy the income stream generated by ownership of the property.
Appreciation is an increase in the market value of a parcel of land over time, usually resulting from a general rise in sale prices of real estate throughout a market area. Such an increase, whether actual or projected, is another investment benefit that contributes to real estate value.
The way a property is used — whether residential, commercial, agricultural, recreational, etc. — in large part determines the property’s value. Each kind of use has its own benefits.
Depending on current tax law, tax benefits from ownership of a property may take the form of preferred treatment of capital gain, tax losses, depreciation, and deferrals of tax liability. These tax benefits contribute to the income and potential sale price of a property.
The Appraisal Foundation
The Appraisal Foundation and USPAP. In the 1980s, a team of professional appraisal organizations agreed on a set of appraisal standards, known as the Uniform Standards of Professional Appraisal Standards (USPAP), and in 1987 established The Appraisal Foundation (TAF) as a not-for-profit organization to administer those standards and generally to advance the profession of appraisal.
TAF provides consulting, citation development, standards of practice procedures, implementation guidelines and other appraisal-related services. To support its mission, TAF established the
- Appraiser Qualification Board (AQB)
- Appraisal Standards Board (ASB)
- Appraisal Practices Board (APB) (as of July 1, 2010)
- Board of Trustees (BOT)
- Appraisal Subcommittee
Appraisal Qualifications Board. The Appraiser Qualifications Board (AQB) is the education and licensing arm of USPAP. This board creates and maintains the National Appraisal Examination, administers the National USPAP courses, and certifies national USPAP instructors.
Appraisal Standards Board. The Appraisal Standards Board (ASB) is the primary source for the content and substance of USPAP standards. It establishes the standards, issues advisory opinions, and works with the AQB to develop courses and certify instructors.
Appraisal Practices Board. The Appraisal Practices Board (APB) issues opinions of valuation methods and techniques. Compliance with APB guidance is voluntary.
Board of Trustees. The Board of Trustees (BOT) appoints board members, secures funding, and monitors performance of the AQB and ASB boards.
Appraisal Subcommittee. The ASC oversees TAF and the state licensing agencies. It also maintains a registry of all state-certified and licensed appraisers who are qualified to perform appraisals of properties that are the subject of federally-related transactions.
In 1989, Congress passed the Financial Institutions Reform, Recovery and Enforcement Act (FIRREA) in response to the savings and loan crisis. This act included provisions to regulate appraisal.
Title XI of FIRREA requires that competent individuals whose professional conduct is properly supervised perform all appraisals used in federally-related transactions. Such federally-related appraisals must be performed only by state-certified appraisers. A state-certified appraiser is one who has passed the necessary examinations and competency standards as established by each state in conformance with the federal standards stated in FIRREA and USPAP (Uniform Standards of Professional Appraisal Practice). The criteria for certification as a minimum must follow those established by the Appraiser Qualifications Board of the Appraisal Foundation.
USPAP standards. The Uniform Standards of Professional Appraisal Practice (USPAP) is a set of standards, guidelines and provisions for the appraisal industry. It resulted from the cooperation of nine national appraisal organizations in 1985.
The “competence” provision requires appraisers to assess whether they have the necessary knowledge and competence to perform a specific assignment. If they do not, they must disclose this fact.
The “departure” provision permits appraisers to perform an appraisal that does not meet all the USPAP guidelines provided they have informed the client of the limitations of the incomplete appraisal and if the partial appraisal will not be misleading.
The “standards” concern:
- recognized appraisal methods
- definition of due diligence
- how appraisal results are reported
- disclosures and assumptions
- appraisal review
- real estate analysis
- mass appraisals
- personal property appraisals
- business appraisals
- compliance with USPAP
- compliance with the Code of Professional Ethics and Standards of Professional Practice
Florida appraiser licensing and certification requires at least 15 hours of prelicensure education in USPAP and additional post-licensure coursework in USPAP.
State licensed and certified appraisers
Florida statute mandates that a person may not use the titles “certified real estate appraiser,” ” licensed real estate appraiser,” or “registered trainee real estate appraiser,” or any words or titles similar to these, nor may a person issue an appraisal report unless the person is certified, licensed, or registered under the requirements of F.S. 475.612. However, someone who is not certified, licensed, or registered may perform the work necessary to complete an appraisal report if that person is supervised, the work approved, and the report signed by a certified or licensed appraiser. Only the certified or licensed appraiser may receive direct compensation for providing valuation services for the report.
Certified appraisers include certified residential appraisers, who issue appraisal reports for residential properties consisting of one to four units, and certified general appraisers, who issue appraisal reports for any type of property.
However, Florida licensed real estate brokers, sales associates, and broker associates may provide valuation services for compensation as long as they do not represent themselves as certified or licensed appraisers or registered appraiser trainees. Real estate licensees may also prepare comparative market analyses, price opinions, and opinions of the value of real estate as long as they do not represent any of these as an appraisal.
Requirements for federally-related transactions. Federal banking law defines a federally-related transaction as “any real estate-related financial transaction which a federal financial institutions regulatory agency or the Resolution Trust Corporation engages in, contracts for, or regulates, and which requires the services of a state-licensed or state-certified appraiser.” The financial transaction must require the services of a certified appraiser to be considered a federally-related transaction. This definition is reiterated in Florida statute.
Federal banking law expands the definition to include a real-estate-related financial transaction as “Any transaction involving:
(A) the sale, lease, purchase, investment in or exchange of real property, including interests in property, or the financing thereof;
(B) the refinancing of real property or interests in real property; and
(C) the use of real property or interests in property as security for a loan or investment, including mortgage-backed securities.”
- meet the definition of a real-estate-related financial transaction
- be engaged in, contracted for, or regulated by any of the five federal financial institutions regulatory agencies: the Board of Governors of the Federal Reserve System, the Federal Deposit Insurance Corporation, the Office of the Comptroller of the Currency, the Office of Thrift Supervision, or the National Credit Union Administration
- require the services of an appraiser
In accordance with FIRREA, all financial transactions involving Freddie Mac, Fannie Mae, FHA, and VA require certified appraisals.
Certified appraisal reports. A certified appraisal involves information that needs to be recorded, photographed, measured, checked, and verified for accuracy. This information is to be included in a certified appraisal report as a legal document that will hold up in court.
Florida statute defines an appraisal report as “any communication, written or oral, of an appraisal, appraisal review, appraisal consulting service, analysis, opinion, or conclusion relating to the nature, quality, value, or utility of a specified interest in, or aspect of, identified real property, and includes any report communicating an appraisal analysis, opinion, or conclusion of value, regardless of title.” The report is certified when it is signed by the authorized appraiser who, by signing the report, is attesting to its facts and procedures being true and correct.
To be recognized in a federally-related transaction, an appraisal report must be in writing and conform to USPAP.
Appraisal service of real estate
Part I, Chapter 475. Florida real estate brokers, broker associates, and sales associates are licensed and regulated by F.S. Chapter 475, Part I. Within this chapter, brokers and sales associates are defined as individuals who perform certain services for other people with the intention of being compensated for those services, the sales associate being required to work under a broker. The services listed in the definition are many but include selling, buying, renting, exchanging, and appraising.
As licensed real estate professionals, brokers and sales associates are not required to be licensed or certified appraisers to perform appraisals. However, they may not appraise federally-related transactions or represent themselves as certified or licensed appraisers. They also may not perform appraisals which require a state-licensed or -certified appraiser or those appraisals which may be performed by a registered trainee appraiser. When performing an appraisal, real estate licensees should obtain a written statement from the client that no federally-related transaction is involved and that a certified appraiser is not required for the appraisal.
Appraisal reports must conform to USPAP. To perform appraisals and prepare appraisal reports, real estate licensees must be familiar with and comply with USPAP standards.
Individuals who apply for registration or certification as an appraiser are required to sign a pledge to comply with USPAP. In complying with the standards of practice, appraisers are required to set aside their personal interests and use impartiality, objectivity, and independence when performing appraisals. Ethical practices under the standards prohibit appraisers from accepting or charging compensation that is based on the value of the property. Failure to comply with USPAP may result in the appraiser or real estate licensee facing discipline.
Comparative Market Analysis (CMA). Real estate licensees routinely prepare comparative market analyses in the course of their business practice. Although licensees are required to comply with USPAP when they prepare actual appraisals, they are exempt from the standards when they perform comparative market analyses as long as these services are not referred to as appraisals.
Broker Price Opinion (BPO). Real estate licensees also routinely prepare broker price opinions. Again, while they are required to comply with USPAP for appraisal services, they are exempt from the standards when they perform broker price opinions or opinions of real estate value as long as these services are not referred to as appraisals.