USPAP and 49 CFR Part 24 Appraisal Provisions

USPAP and 49 CFR Part 24 (Appraisal Provisions of 49 CFR)

The State of the Real Estate Industry in 2010

The State of the Appraisal Industry in 2010

Definitions of Appraisal Terminology (NOT from USPAP or 49 CFR) Purpose of the Appraisal – To make a living in the appraisal business.

Definitions of Appraisal Terminology (NOT from USPAP or 49 CFR) Highest and Best Use – Whatever the person who is paying for the appraisal wants to do with the property.

Definitions of Appraisal Terminology (NOT from USPAP or 49 CFR) Capitalization Rate – The number which is arrived at by dividing the number the client wants by the net operating income.

Definitions of Appraisal Terminology (NOT from USPAP or 49 CFR) Eminent Domain – From the Latin. Eminent, meaning big, or prominent. Domain, meaning where one lives. Hence, a big house.

49 CFR Part 24 - Subpart B 1. Appraisal Requirements 2. Appraiser Qualifications 3. Uniform Act Appraisal “Requirements” vs. USPAP “Standards” 4. Scope of Work

Key Topics l Appraisal Requirements § 24. 2(a)(3) and § 24. 103(a) and Appendix A Agency Responsibilities § 24. 103(a)(1) & (2)

Key Topics Appraiser/Review Appraiser Responsibilities § 24. 103(a) and § 24. 104(a) and (b) Uniform Act Appraisal “Requirements” vs. USPAP “Standards” References to USPAP standards are found in § 24. 103(a) and Appendix A

Key Topics l Scope of Work § 24. 103(a) and Appendix A

49 CFR Appraisal - Definition l 24. 2 (a) (3) – “Appraisal. The term appraisal means a written statement independently and impartially prepared by a qualified appraiser setting forth an opinion of defined value of an adequately described property as of a specific date, supported by the presentation and analysis of relevant market information. ”

USPAP Appraisal - Definition “(noun) the act or process of developing an opinion of value; an opinion of value. (adjective) of or pertaining to appraising and related functions such as appraisal practice or appraisal services. ” (USPAP; “Definitions”)

“(noun) the act or process of developing an opinion of value; an opinion of value. (adjective) of or pertaining to appraising and related functions such as appraisal practice or appraisal services. ” (USPAP; “Definitions”) 24. 2 (a) (3) – “Appraisal. The term appraisal means a written statement independently and impartially prepared by a qualified appraiser setting forth an opinion of defined value of an adequately described property as of a specific date, supported by the presentation and analysis of relevant market information. ”

Criteria for Appraisal l Reference: 24. 103 and Appendix A

49 CFR and USPAP l 49 CFR appraisal “requirements” USPAP “standards”

49 CFR and USPAP l 24. 103 l Criteria for appraisals. (New Rule Appendix A) l The term "requirements" is used throughout this section to avoid confusion with The Appraisal Foundation's Uniform Standards of Professional Appraisal Practice (USPAP) "standards. "

49 CFR and USPAP “ Section 24. 103(a) Appraisal requirements. The first sentence instructs readers that requirements for appraisals for Federal and federally-assisted programs or projects are located in 49 CFR part 24. These are the basic appraisal requirements for Federal and federally-assisted programs or projects. ”

Section 24. 103(a) (continued) “ However, Agencies may enhance and expand on them, and there may be specific project or program legislation that references other appraisal requirements. ”

Section 24. 103(a) (continued) “ These appraisal requirements are necessarily designed to comply with the Uniform Act and other Federal eminent domain based appraisal requirements. l They are also considered to be consistent with Standards Rules 1, 2, and 3 of the 2004 edition of the USPAP. ”

Consistency with USPAP l Consistency with USPAP has been a feature of these appraisal requirements since the beginning of USPAP. This "consistent" relationship was more formally recognized in OMB Bulletin 92 -06.

Comparison of 49 CFR & USPAP l Government acquisition of private property in support of public programs l Various private sector needs but dominated by mortgage lending

Comparison of 49 CFR & USPAP Comply with Constitution: l “Just Compensation”, l based on l “Fair Market Value” appraisal l Provide order and control of the appraisal profession l Avoid confusing and misleading appraisal users and protect appraisers l

Comparison of 49 CFR & USPAP Fair treatment of owner(s) and taxpayer l Based on the assumption that the acquiring agency is a knowledgeable user or appraisal services l Set nationwide standards l Appraisal user may have limited or no appraisal knowledge l

Comparison of 49 CFR & USPAP Agency knows what is needed and why l Appraiser may need information and guidance to comply with applicable laws, regulations, policies and procedures l l Appraiser determines what is needed and sets the appraisal parameters

Consistencies with USPAP l A written statement l Standard 2 – Reporting l Independently and impartially prepared l Ethics provision – conduct l By a qualified appraiser l l Setting forth an opinion of defined value Standard 1, Standards Rule 1 l Standards Rule 1 and 2

Consistencies with USPAP l of an adequately described property l Standards Rule 1 and 2 l as of a specific date l Standards Rule 1 and 2 l supported by the presentation l Standards Rule 2

Consistencies with USPAP l and analysis l Standards Rule 1 l of relevant market information l Standards Rule 1 and 2

Appraisal Requirements Identification of “Real Property” and “Personal Property” l Reference 24. 103(a) and Appendix A

The Appraisal Assignment l Reference 24. 103(a) and Appendix A l The agency is to participate in : – Defining the appraisal problem – Developing the scope of work

The Appraisal Assignment l§ 24. 103 (a) (1) l “The Agency acquiring real property has a legitimate role in contributing to the appraisal process, especially in developing the scope of work and defining the appraisal problem. The scope of work and development of an appraisal under these requirements depends on the complexity of the appraisal problem. ”

The Appraisal Assignment l “ 2) The Agency has the responsibility to assure that the appraisals it obtains are relevant to its program needs, reflect established and commonly accepted Federal and federally-assisted program appraisal practice, and as a minimum, complies with the definition of appraisal in § 24. 2(a)(3) and the five following requirements: (See appendix A, §§ 24. 103 and 24. 103(a).

The Appraisal Assignment (i) “An adequate description of the physical characteristics of the property being appraised (and, in the case of a partial acquisition, an adequate description of the remaining property), including items identified as personal property, . . . ”

The Appraisal Assignment (ii) All relevant and reliable approaches to value consistent with established Federal and federally-assisted program appraisal practices. If the appraiser uses more than one approach, there shall be an analysis and reconciliation of approaches. . . ”

The Appraisal Assignment (iii) A description of comparable sales, including a description of all relevant physical, legal, and economic factors such as parties to the transaction, source and method of financing, and verification by a party involved in the transaction.

The Appraisal Assignment (iv) A statement of the value of the real property to be acquired and, for a partial acquisition, a statement of the value of the damages and benefits, if any, to the remaining real property, where appropriate.

The Appraisal Assignment v) The effective date of valuation, date of appraisal, signature, and certification of the appraiser.

Qualifications of Appraisers and Review Appraisers l 24. 103(d) - The agency shall establish criteria for determining the minimum qualifications and competency of appraiser and review appraisers. l Qualifications shall be consistent with the scope of work for the assignment.

Qualifications of Appraisers and Review Appraisers l 24. 103(d) (continued) “The agency shall review the experience, education, training licensing, designation(s) and other qualification of appraisers, and review appraisers, and use only those determined by the agency to be qualified. ”

Qualifications of Appraisers and Review Appraisers l Agency considerations/factors: – Competency – Experience – Education – Training – Certification/licensing – Professional designations

Qualifications of Appraisers and Review Appraisers l Agency responsibility: – Set criteria on minimum qualifications – Assure qualifications match the scope of work – Contract (fee) appraisers must be state licensed/certified.

49 CFR Part 24 “Scope of Work” Link to FHWA Appraisal “Scope of Work” Template: http: //www. fhwa. dot. gov/realestate/sow 4. htm

Scope of Work Why was the “scope of work” text added to the regulation? The Scope of Work language replaces and supplants the former appraisal problem statement.

Scope of Work l It is an infinitely variable standard driven by the circumstances of the appraisal assignment. l It is a vehicle of agreement and communication between the agency and the appraiser.

Scope of Work l The scope of work requirements in the Final Rule are written on the basis that the Acquiring Agency is a “knowledgeable user” of appraisal services.

Scope of Work l It is a written statement that defines the general parameters of the appraisal. l It is developed together by the appraiser and the agency. l It is prepared before the appraisal work starts l It should be updated as needed.

Scope of Work l It matches the UA and 49 CFR requirements to the appraisal problem, covering: – The definition of “appraisal” in the UA – Specific rule requirement in 24. 103(a)(2) – appraisal shall be relevant to program needs – Specific rule requirement in 24. 103(b) – Project influence

Scope of Work l Should address: – Purpose/function of the appraisal – Definition of the estate to be appraised – Definition of “Fair Market Value”, if applicable. – Assumptions and limiting conditions. – 24. 103(a)(1)-(5) requirements

Scope of Work l 24. 103(a)(2)(i) requirements – Identify items of personal property – An adequate description of the physical characteristics of the property being appraised – Title information, zoning, highest and best use – At least a five year sales history

Scope of Work l 24. 103(a)(2)(i)-(v) requirements – All relevant and reliable approaches to value – If more than one approach is used, an analysis and reconciliation of approaches to value shall be included.

Scope of Work l 24. 103(a)(2)(iii) requirements – A description and analysis of comparable sales l A discussion of all relevant physical, legal, and economic factors – Verification of sales data with at least one party involved in the transaction

Scope of Work l 24. 103(a)(2)(iv) requirements – A statement of the value of the real property to be acquired – For a partial acquisition, a statement of the value of the damages and benefits, if any to the remaining real property, where appropriate

Scope of Work l 24. 103(a)(2)(v) requirements – The effective date of the valuation – A statement of the value of the real property to be acquired, and a statement of damages, if any – Date of the appraisal – Signature and certification of the appraiser

Scope of Work Example The appraiser must, at a minimum: PROJECT disregard any decrease or increase in the fair market. INFLUENCE value of the property caused by the – In developing and reporting the appraisal, project for which the property is being acquired or by the likelihood that the property would be acquired for the project.

Scope of Work Example l Definition l of Market Value: This will be determined by State law, but typically includes the following: – Buyer and seller are typically motivated

Scope of Work Example l Definition l of Market Value: This will be determined by State law, but typically includes the following: – Buyer and seller are typically motivated – Both parties are will informed or well advised, each acting in what he or she considers his or her own best interests

Scope of Work Example l Definition l of Market Value: This will be determined by State law, but typically includes the following: – Buyer and seller are typically motivated – Both parties are will informed or well advised, each acting in what he or she considers his or her own best interests – A reasonable time is allowed for exposure in the open market

Scope of Work Example l Certification: l Typically the required certification will be in the State DOT’s FHWA-approved Right-of-Way or Appraisal Manual.

Scope of Work Example Assumptions and Limiting Conditions: The appraiser shall state all relevant assumptions and limiting conditions necessary. In addition, the acquiring agency may provide other assumptions and conditions that may be required for the particular appraisal assignment.

Realty/Personalty Report l Identify: – Personal property – 24. 103(a)(2)(i) – Real property – Appendix A 24. 103(a)(i)

Agency Responsibility l Acquiring agency responsible to assure that appraisals: – Are relevant to its program needs – Reflect established and commonly accepted Federal and federally-assisted program appraisal practices

Agency Responsibility l Acquiring agency responsible to assure that appraisals: – As a minimum, comply with both: Definition of appraisal in 24. 2(a)(3) l Five requirements in 24. 103(a)(2) (i)–(v) l

Just Compensation (a reminder) l Agency official must determine the just compensation offer based on:

Just Compensation (a reminder) l Agency official must determine the just compensation offer based on: – Waiver valuation – Approved appraisal l Staff review appraiser may be authorized by agency to perform this function

49 CFR Part 24 Subpart B Questions and Answers

Discussing 49 CFR and USPAP Appraisal Requirements and Methodology with Management