Faulty appraisals and need to revisit appraisal basics: Part 1 - by Roger Durkin

Roger Durkin, Durkin Law, P.C

Legend has it that Coach Vince Lombardi, while addressing his Green Bay Packers at half-time, said “Gentlemen, let’s get back to basics, this thing in my hand is a football.” My back-to-basics idea arises from my more than 40-years’ experience teaching narrative appraisal report writing, teaching USPAP to all disciplines throughout the U.S., Mexico, Canada, and as far away as Lithuania, writing textbooks and teaching expert witness, ASA’s 30-hour Appraisal Review courses, and the experience reviewing hundreds of appraisal reports.

Standards of Appraisal Practice have evolved since the 1986 founding of USPAP. Many appraisers have not evolved. While improving appraisal standards is a positive action, the evolving standards have come with ambiguous interpretations and with appraisers’ refusal to accept or otherwise simply ignore USPAP changes. There exists a doctrinaire insistence on the use of archaic terms like purpose-of-the-appraisal, function, and estimate of value. This misuse of long-ago abandoned USPAP terms adds confusion and even anarchy to the appraisal process. Anarchy involves appraisal associations, including ASA, AI, and others who have developed their own proprietary appraisal practice principles that often conflict with USPAP. Business appraisers almost uniformly ignore USPAP and instead rely on IRS Standards or AICPA appraisal standards.

Last year, I reviewed all appraisals involved in the $15 billion Trans Alaska Pipeline assessor dispute. Similarly I reviewed the appraisals for the $6 Billion assessment dispute of all Verizon real and personal property in California, and a dozen similar machinery and equipment appraisals. In addition, we routinely review complex appraisals of real, personal and intangible property in litigation. Here are two less significant review assignment results used to demonstrate the need to revisit the appraisal process basics.

The first is a 2016 personal property appraisal presented on a Fannie Mae general TADD form. The purpose was described: “the purpose of this report is to estimate the fair market value of the charitable contribution described in this report and defined in the IRS publication 561. The use of this report is limited to decision making only. Any other use is prohibited. Use by persons other than the client is also prohibited” Scope: This appraisal report is a summary of all information significant to the solution of the appraisal problem. A summary is sufficient information which encompasses the scope of work according to Standards Rules 2-2. The appraisal is concerned with the fair market value of building materials thus the valuation encompasses reusable material which consists of personal property removed from the residence.” The appraiser knew it was a charitable donation appraisal of personal property but cites USPAP Standard 2-2. Then defines the type of value, not as fair market value defined by IRS, but as the market value of the depreciated replacement value. The appraiser defined market value using the OCC definition but did not cite the source. No clear statement of intended use, intended users, appropriate definition of value. No description of the scope of work performed.

I recently reviewed a 2016 decedent estate real property appraisal prepared by two highly qualified MAI designated appraisers. Each appraiser had over 20-years’ experience. They wrote, “the purpose of the appraisal is to estimate the market value of the fee simple interest of the subject property. The intended use of the appraisal is for internal use.” What does that mean? The appraisers cited their market value definition as “USPAP Glossary page 199”. They did not cite the appropriate applicable definition of value from IRS § 20.2031. USPAP dropped the Glossary in 2005. 2016 USPAP does not have a page 199. The report did not mention intended users, or intended use. The appraisers said “this report was prepared in compliance with Standard Rule 2-2(b) for a Summary Report. As of 2006, the ASB removed Summary Report from USPAP. Why did the appraisers not know? If the appraisers take a USPAP update course every two-years, why did they not know of these decade old changes?

Part two will appear in the February 10 issue in Appraisal & Consulting section.

Roger Durkin, JD, MS, FASA is an attorney and appraiser with Durkin Law PC, Boston, Mass.