The process of becoming an appraiser differs according to the various appraisal disciplines. Most appraisers are required to have a certain number of hours of education and experience. In addition, if an appraiser wishes to become state licensed or certified in real property or if an appraiser wishes to become “designated” by an appraiser organization, they must also pass a comprehensive examination.
Currently, the government regulates only real property appraisers. The power of regulation currently rests with the individual states and territories that issue licenses and certifications to real property appraisers. In addition, each individual state appraiser regulatory agency is responsible for disciplining appraisers.
In simplest terms, an appraisal is “the act or process of developing an opinion of value” of an asset. The asset in question could be anything, from fine art to machinery and equipment, or even a specific type of business. Real property appraisals may include single-family homes, apartment buildings and condominiums, office buildings, shopping centers, industrial sites, and farms.
The reasons for performing a real property appraisal are as varied. They are usually required necessary when real property is sold, mortgaged, taxed, insured, or developed. For example, appraisals are prepared for:
- Mortgage lending purposes
- Tax assessments and appeals of assessments
- Negotiation between buyers and sellers
- Government acquisition of private property for public use
- Business mergers or dissolutions
- Lease negotiations
Professional appraisers adhere to a written set of performance standards, known as the Uniform Standards of Professional Appraisal Practice (USPAP). USPAP contains standards for all types of appraisal services including real property, personal property, business valuation and mass appraisal. USPAP compliance is also required by professional appraisal associations, client groups and by dozens of federal, state and local agencies. By following USPAP, a professional appraiser helps foster public trust in valuation through:
Impartiality and Objectivity: A professional appraiser must be independent, impartial, and objective. A professional appraiser’s opinion of value must not be biased.
Ethical Conduct: A professional appraiser will adhere to a generally recognized code of ethical conduct, which is contained in USPAP. In addition, many professional appraisal societies have their own codes of conduct.
Full Disclosure: A professional appraiser will disclose all relevant information to ensure that the appraisal is understandable to the user, and not misleading.
Confidentiality: A professional appraiser will treat confidential information as such. When in doubt, the appraiser should always check with the client to determine what is or is not confidential information.
Competency: A professional appraiser should have knowledge and experience in performing similar assignments.
Independence: A professional appraiser cannot be compensated based upon the results of the appraisal.
Three approaches to value are typically considered in an appraisal: a cost approach, a sales comparison approach, and an income approach.
In the cost approach, the cost to construct a property less is added to the land value to indicate the total value. The cost approach is most applicable for newer buildings since buildings can depreciate at different rates. The cost approach is based upon the principle of substitution, which states that property values tend to be set by the price of acquiring an equally desirable substitute property. The cost approach, however, does not reflect the going concern (business) value.
The sales comparison approach is most applicable in an active market in which a number of similar properties have recently sold. The appraisers gather data on transactions involving comparable properties and make adjustments for dissimilar characteristics. The sales comparison approach relies upon a market derived unit of comparison such as price per square foot or income multiplier.
The income capitalization approach reflects the relationship between income and value. In other words, an investor who purchases income-producing real estate is essentially trading present dollars for the expectation of receiving future dollars. The projected income is converted into value through either direct capitalization (single period) or discounted cash flow analysis (multi-period). Factors such as risk, time, recapture of the asset, and investment rates for competing investments are considered in selecting capitalization rates.
The final step in the valuation process is the reconciliation of the value indications. In the reconciliation, the appraisers consider the relative applicability of each of the approaches used, examines the range of the value indications, and gives the most weight to the approach that appears to produce the most reliable indication of value. The purpose of the appraisal, the type of property, and the adequacy and reliability of the data are all given consideration in the reconciliation.
Appraiser Trainee: Someone who is qualified to appraise those properties, which the supervising certified appraiser is qualified to appraise.*
Licensed Real Property Appraiser: Someone who is qualified to appraise non-complex one to four units having a transaction value less than $1,000,000 and complex one to four residential units having a transaction value less than $250,000. This classification does not include the appraisal of subdivisions.*
Certified Residential Real Property Appraiser: Someone who is qualified to appraise one to four residential units without regard to value or complexity. This classification does not include the appraisal of subdivisions. To be a state certified residential appraiser qualified to do appraisals for federally related transactions, a state must have requirements that meet or exceed this minimum standard.
Certified General Real Property Appraiser: Someone who is qualified to appraise all types of real property. To be a state certified general appraiser qualified to do appraisals for federally related transactions, a state must have requirements that meet or exceed this minimum standard.
More information can be found on The Appraisal Foundation Web site
The role of the appraiser is to provide objective, impartial, and unbiased opinions about the value of real property—providing assistance to those who own, manage, sell, invest in, and/or lend money on the security of real estate. Appraisers assemble a series of facts, statistics, and other information regarding specific properties, analyze this data, and develop opinions of value. Each appraisal assignment challenges the appraiser’s ability to put analytical skills into practice, exercise sound judgment, and communicate effectively.