Keys for Avoiding USPAP Sanctions Larry Disney, Executive Director Kentucky Real Estate Appraisers Board

How is the appraisal profession today? © Larry Disney “The world as we have created it is a process of our thinking. It cannot be changed without changing our thinking.” - Albert Einstein.

What others are saying! © Larry Disney It is said the residential appraiser will not be needed in the next 5 years. It is said technology will negate the need for a residential appraiser. The above can only happen if the professional appraisers assist by failing to realize the need for change!

Qualification versus Competency © Larry Disney How many of you are state licensed or certified appraisers? Qualification and Competency are not synonymous!! Having a license/certification implies a higher level of public trust than someone who does not; thus, greater responsibility. If so, each one of you is equally qualified by your state to practice the assignment types permitted by your credential.

What can you do? © Larry Disney While the current system may not be perfect, it is certainly better than the alternative. All credentialed appraisers must accept the challenge of responsibility by becoming actively involved in the appraiser regulatory system within their state. Join a professional organization, but support and include all groups.

What can you do? © Larry Disney Become familiar with the work of The Appraisal Subcommittee (ASC) Become familiar with the work of the Appraisal Foundation, ASB, AQB, APB exposure drafts:

What can you do? © Larry Disney Research the websites of the professional organization websites, review the documents, and take the education. You can take more than the minimum CE hours each cycle! Actions and words point to being a professional. Act professional, practice professionally, and support the profession. (Watch what you say and how you say it.)

We can assist change, if we work to do so! To make the system work, we must all begin to work together and make it happen. “Everyone thinks of changing the world, but no one thinks of changing himself.”* *Leo Tolstoy 8© Larry Disney 2016

Never stop learning or questioning. © Larry Disney “Education is the most powerful weapon which you can use to change the world. - Nelson Mandela Let’s begin with understanding and practicing USPAP and use it as a shield against grievances and complaints.

How can YOU prevent USPAP Deficiencies? © Larry Disney Know the truth and let the truth set you free.  You control both your appraisal development and report content.  Never misrepresent your role in an assignment.  Let no person coerce, threaten or influence your objectivity, impartiality, or independence. - A low fee and a quick turn time will not return the cost and time for defending a regulatory complaint.

(c) Larry Disney May Practice THE STANDARDS of your profession. Pages 1-16 Pages Pages 17-21

(c) Larry Disney May Std. 2 SR 1-2 SR 1-2(h) SR 1-3 SR 1-5 SR 1-4 SR 1-6 Engagement Letter Not in SOW

(c) Larry Disney May Practice THE STANDARDS of your profession. Other assignment conditions often apply, e.g. Interagency Appraisal Evaluation Guidelines, Fannie/Freddie, FHA and VA, and others. What if other conditions or standards conflict with USPAP? Reality, it is my opinion USPAP compliance is possible when using other standards. Why USPAP? It is recognized in Title XI, states give it the force of law.

(c) Larry Disney Fact versus Myth – USPAP is too Restrictive! © The Appraisal Foundation

Mistakes that can lead to a sanction. © Larry Disney Failure to identify an appropriate scope of work for each appraisal assignment; Failure to identify relevant assignment characteristics; and Failure to be familiar with the appraisal process.

Mistakes that can lead to a sanction. © Larry Disney Reliance on pre-printed forms as being USPAP compliant. Failure to summarize or provide written support for the opinions developed and reported. Using canned statements or those taken from other reports. Using the URAR 1004 for every assignment. #1 concern, land form.

How well is the regulatory system working? Appraiser regulatory enforcement, is it effective? KREAB appraiser complaint findings: Negligence (competency) 95% – Residential 90% – General 10%, but more complex. 17© Larry Disney 2016

How well is the regulatory system working? Approximately 100 complaints logged by KREAB each year. 42% Complaints dismissed since 1990 Anonymous, less than 5% 18© Larry Disney 2016

19 Appraisal requested May 2016 from a CR appraiser for mortgage lending decision, complete a report using FNMA 1004 URAR, proposed new construction. Instructions: Appraise subject using plans and specifications (both submitted) Size 3,000 SF above grade, no basement Consider the following.

© Larry Disney Instructions: Unique design, and quality of materials noted as excellent. Deed shows 10-acre site was purchased $100,000, May 2015 Builder contract $425,000 Consider the following.

© Larry Disney Vacant land sales provided by the appraiser. ElementsSubjectSale 1Sale 2Sale 3Sale 4 Sale Price$100,000$80,000$120,000$100,000$133,000 Sale Date05/201501/201605/201601/201602/2016 Site Size10.00 Acres 5.81 Acres Acres Adjusted Sales Price $100,000$110,000$120,000$100,000$120,000 Appraisers opinion of land value $110,000.00

Cost Approach developed by the Appraiser © Larry Disney Site Value$110, Dwelling3,000 $90.00 =$267, Porches/Decks$ 18, Garage =$ 13, DepreciationPhysical/Functional/External$ 0.00 Other Site Improvements Driveway, Landscaping, 25’ x 40’ Barn$ 20, Value via Cost Approach$429, No physical, functional or external obsolescence issues or concerns are present within the subject property site, existing or proposed improvements or the market area. Value indicated is based on subject dwelling being completed per plans and specifications. Cost figures have been taken from Marshall-Swift Replacement Cost, and adjusted with the local builders cost.

© Larry Disney Sales comparison approach developed by the Appraiser ElementsSubjectSale 1Sale 2Sale 3Sale 4 Sale Price$377,000$481,000$462,000$412,000 Sale DateN/A / /2015 Site Size10.00 Acres 5.75 Acres10.00 Acres 7.00 Acres 5.00 Acres House Size3,000 SF2,867 SF4,600 SF3,100 SF3,000 SF AgeNew4-Years13-Years22-Years2-Years Distance1-Mile3-Miles8-Miles5-Miles Adjusted Sales Price $398,500$427,500$422,000$431,000 Indicated value via sales comparison: $428,000.00

Sales comparison reconciliation by appraiser. © Larry Disney Sales Comparison Approach Reconciliation: All sales are the most similar that were available within the last 12 months, and within a 5 mile radius. All Sales are closed.

Final reconciliation by the appraiser. © Larry Disney Insufficient rental and sales data available for the development of the income approach. The market approach is given most consideration to determine a final value due to there being available sales for comparison. The cost approach is supportive of the indicated market value estimate. Cost Approach$429, Sales Comparison Approach$428,000,00 Income ApproachN/A

Improved sales located by investigator. © Larry Disney ElementsSubjectSale 1Sale 2Sale 3Sale 4 Sale Price$550,000$500,000$475,000$456,000 Sale DateN/A / Site Size10.00 Acres 9.5 Acres8.00 Acres 7.00 Acres 5.00 Acres House Size3,000 SF3,500 SF2,950 SF2,700 SF2,300 SF AgeNew 1-Year New Distance5-Miles10-Miles7-Miles15-Miles Your thoughts, concern or not? The sales prices are not adjusted, why?

Possible issues. Building contract $425,000 w/o site, versus $429,000 appraised value, including site? Appraiser sales adjusted $428,000 versus the investigator sales from $456,000 to $550,000? Given the market data information, considering possible omissions and commissions, are the results credible for the intended use? Would you rate the assignment results credible? 27© Larry Disney 2016

Dismiss or Sanction(s) Dismiss Letter of Reprimand Education Fine Suspension of license Revocation of license 28© Larry Disney 2016

Supporting the opinions developed and reported is the KEY for compliance! © Larry Disney Although perfection is not attainable or expected, the appraiser must use diligence and care to not render appraisal services in a careless or negligent manner. Therefore, the expectation is due diligence and due care, but not perfection or compliance with a perceived best practice. The assignment development and final opinions must be judged, not by a best practice set by a client, a reviewer, a state enforcement agency or others. You, and only you, have the control to ensure USPAP compliant appraisal assignments.

Where do we go from here? Together, we will all continue to evolve in our efforts for enhancing public trust in the appraisal profession through the cooperative efforts of appraisers, regulatory agencies, professional groups, and all interested parties. The future will only be as good as each of you, and ALL professional appraisers make it! 30© Larry Disney 2016

Q&A  Larry Disney, Executive Director  Kentucky Real Estate Appraisers Board  135 W. Irvine Street, #301  Richmond, KY  Phone   © Larry Disney 2016