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Crossroads to reform.

CROSSROADS to REFORM

TODAY'S troubled real estate market, combined with current banking hardships, has emphasized the importance of establishing meaningful real estate appraisal guidelines and qualifications. In 1989, President Bush signed the Financial Institutions Reform, Recovery and Enforcement Act (FIRREA) with the intent of reforming the lending and appraisal industries. The law's mandate still stands - lenders must establish quality control systems for appraisals, and appraisers must meet qualifications to perform certain types of transactions.

As the nation's leading appraisal organization, the Appraisal Institute has been instrumental in developing a multi-tiered program of appraisal reform. By working with allied real estate professionals, financial institutions, legislators and regulatory agencies, the Appraisal Institute is taking steps to elevate the appraisal profession. Recent efforts include expansion of its educational and professional resources to meet the needs of nonmember appraisers. With appraiser licensing and certification as a starting point, the appraisal profession can concentrate its efforts on preparing appraisers to meet the challenges of today's increasingly volatile market economy.

In examining how appraisers are adapting to both the changing expectations of the marketplace and the users of appraisal services, this article will show how the Appraisal Institute employs its educational courses, experience, standards and ethics programs to prepare its members to adjust to today's conditions. The article will also explore the Appraisal Institute's plan to broaden the scope of its programs to include licensed and certified appraisers.

Adapting to a new economic climate

While appraisers continue to use the same property-valuation techniques used in pre-FIRREA times, the emphasis of their reports and studies has shifted. Due to current economic conditions, appraisers are placing more importance on analysis. Studies of supply and demand, sales information and financial data have become crucial. Such basic economic indicators as absorption trends, unemployment and affordability all carry increased weight in the appraisal equation.

Changing attitudes

The problems the financial and real estate markets are experiencing are partially the result of users of appraisal services hiring the cheapest or fastest appraiser available. Because so little attention was paid to appraisal reports in the 1980s, the hiring of unqualified appraisers became common practice. The short-sightedness of these actions greatly contributed to the financial burden the banking industry faces today.

Treating appraisals as "rubber stamps" or "quick fixes" in order to accommodate loan requirements is an unhealthy and unacceptable way to conduct business under any circumstances. Clients must give the conclusions reached in appraisal reports serious consideration before making important real estate decisions. Equally important, lenders need to take a closer look at the quality of the appraisal product and the appraisers who are hired to prepare them.

An appraisal report should reflect appraisers' understanding of basic economic and appraisal principles. It should also demonstrate their ability to interpret pertinent data and should show their sound judgment in selecting appropriate techniques and procedures - as well as their skill in applying these techniques to derive an estimate of a specifically defined value. The best appraisal report is one that enables readers to understand the purpose of the appraisal and the factual data provided and to follow the appraiser's reasoning from these facts to the final conclusion.

Users of appraisal services must understand the need for enlisting a professional who can produce an appraisal report that can be supported. In every field of business certain groups of individuals are recognized as having greater skills and higher abilities than others. In the appraisal field, these groups are generally made up of individuals who have had extensive training and experience, who subscribe to codes of professional ethics and standards of professional practice and who have received professional recognition for their abilities.

Education for appraisers

Corporate America and academic institutions nationwide are beginning to realize that, technical training, on its own, falls short of preparing individuals for the problem-solving skills they need to perform competently. This is particularly true in the appraisal profession. The increasing sophistication of the real estate and financial markets demands that real estate appraisers have a fundamental knowledge of economics, accounting, finance, business administration, architecture, law, engineering, sociology and English composition.

While specialized courses in real estate appraising draw upon each of these disciplines, the Appraisal Institute recognizes that an advanced education can lay the groundwork for a basic understanding of the various factors that influence market values. In addition, an undergraduate degree provides opportunities to strengthen research, writing and problem-solving skills. Accordingly, Appraisal Institute members are required to have a four-year college degree at the time of designation.

The Appraisal Institute has built a curriculum of courses and seminars that integrate the broad range of skills required by an appraiser to exercise valid judgment, draw sound value conclusions and effectively communicate those conclusions. As the publisher of the nation's largest library of appraisal literature, the Appraisal Institute offers a collection of books, monographs and videotapes that reflect changing appraisal techniques and applications.

The Appraisal Institute's curriculum not only introduces appraisers to residential and income-property appraising, but also offers analytical programs that go beyond traditional appraisal disciplines. Many courses include case studies and drill problems that are used to test students' abilities to apply learned valuation techniques to various types of real properties.

Most educational courses in the Appraisal Institute's national core curriculum are week-long, intensive classes. To augment the course offerings, more than 70 continuing education seminars are offered on topics ranging from discounted cash-flow analysis to written communication skills. Through these seminars, appraisers are able to keep abreast of recent developments in appraisal methodology. Seminars that help appraisal practitioners measure the effect of current market conditions on property value are also available. The Appraisal Institute's extensive educational resources integrate basic appraisal principles with advanced technical knowledge. The overall educational program is designed as a continuum that equips appraisers with the skills needed to produce quality work.

Licensing and certification

The Appraisal Institute has supported and promoted the proper implementation of FIRREA in hope of upgrading the entire appraisal profession. To make appraisal education readily available, the Appraisal Institute has developed education programs to help individuals prepare to meet their state's appraiser certification and licensing requirements. To develop this program, the Appraisal Institute drew from its established courses and published texts to create course materials that present current real estate appraisal concepts and procedures in a comprehensive, easy-to-use format.

In addition, four review seminars were developed to help practicing appraisers review key concepts that may be covered on state examinations. Many of the standard courses offered by the Appraisal Institute have also been approved for credit toward state appraisal licensing or certification requirements.

Professional standards and ethics

Systems of appraiser accountability have been instituted by reputable appraisal organizations for a long time. But before FIRREA, more than half of the country's practicing appraisers were free to perform appraisals without being subject to any competency requirements or peer review system. A visible reminder of this lack of checks and balances on appraisal and lending practices is the number of properties now possessed by the Resolution Trust Corporation.

The Appraisal Institute actively enforces its "Code of Professional Ethics and Standards of Professional Appraisal Practice." In fact, it spends more than $1 million per year to conduct peer review activities. The number of members against whom disciplinary action is taken is a very small percentage of total membership. The Appraisal Institute promotes trustworthy appraisers by emphasizing educational counseling and making members aware of the strong disciplinary system that penalizes those who fail to observe ethical rules and appraisal standards.

Under the Appraisal Institute's standards system, appraisal violations are enforced by either the Appraisal Institute's Standards of Professional Practice and/or its Code of Professional Ethics. The Standards of Professional Appraisal Practice consist of the Uniform Standards of Professional Appraisal Practice, three supplemental standards and guide notes to help members apply advanced appraisal methodology and procedures to appraisal assignments. The Code of Professional Ethics consists of a series of specific rules that establish a minimum level of ethical conduct to be followed by Appraisal Institute members and affiliates.

The peer review process is also divided into two parts. Counseling, which is essentially educational in nature, is given in those cases in which a standards rule has not been met. Disciplinary action is reserved for those cases in which it is alleged that an ethical rule has not been observed.

If an appraisal is referred to the Appraisal Institute, the report will first be reviewed by a professional screener who is employed by the Appraisal Institute. If the screener believes a further investigation is warranted because of alleged ethical rule violations, the report will be referred to a grievance committee. The grievance committee is then required to conduct a thorough investigation of both the preparation of the appraisal and the manner in which the appraisal is communicated in the report.

If the data gathered by the grievance committee in the course of its investigation warrants, a formal complaint will be filed, and a hearing will be held to determine whether or not the member violated the Code of Professional Ethics. If found to have violated the Code, the member will be disciplined. Disciplinary actions include admonishment, censure with publication, suspension and expulsion.

Assessing appraiser qualifications

With the advent of appraiser licensing and certification, those who seek appraisal services finally have a reliable means of judging an appraiser's level of education and experience. Yet, vast differences remain between appraisers who meet their state's minimum requirements and designated members of the Appraisal Institute. When selecting an appraiser, potential clients should assess their goals and objectives to ensure the appraiser hired has the level of training and experience necessary to perform the assignment. To determine an appraiser's competency, users of appraisal services should become familiar with the varying level of experience and education required for each category.

Licensed appraisers - FIRREA guidelines require that appraisers who perform residential appraisals on properties serving as collateral for loans made by federally regulated lenders be licensed. Licensed appraisers must satisfy their state's licensing requirements, which usually consist of 2,000 hours of appraisal experience and successful completion of an examination taken after a candidate has finished 75 hours of course work. The couse work must include coverage of the Uniform Standards of Professional Appraisal Practice.

Certified appraisers - A certified appraiser, according to FIRREA, must be used in commercial real estate transactions of more than $250,000, residential transactions of more than $1 million and for complex residential transactions that involve mortgages of more than $250,000 or residential properties of more than four units. To satisfy state certification requirements, appraisers must complete 2,000 hours of appraisal experience and 165 hours of course work that includes coverage of the Uniform Standards of Professional Appraisal Practice, after which they must complete an examination.

Appraisal Institute members - The Appraisal Institute's MAI membership designation is held by appraisers who are experienced in the valuation of commercial, industrial, residential and other types of properties, and who advise clients on real estate investment decisions. Candidates for the Appraisal Institute's MAI membership designation must fulfill the following technical requirements: * Receive a passing grade on seven or

more examinations to test the candidate's

knowledge of 1) real estate

appraisal principles; 2) capitalization

techniques; 3) urban appraisal problems;

4) standards of professional

practice; 5) report writing and valuation

analysis; * Receive a passing grade on the comprehensive

exam; * Receive a passing grade for an income

demonstration appraisal report; * Receive credit for 4,500 hours of

specialized appraisal experience.

The Appraisal Institute's SRA membership designation is held by appraisers who are experienced in the valuation of single-family homes, townhomes and residential income properties up to four units. Candidates for the Appraisal Institute's SRA membership designation must fulfill the following technical requirements: * Receive a passing grade on three or

more examinations to test the candidate's

knowledge of 1) real estate

appraisal principles; 2) residential

valuation; 3) standards of professional

practice; * Receive a passing grade for one

demonstration appraisal report relating

to a one- to four-unit residential

property. * Receive credit for 3,000 hours of

residential appraisal experience.

Members of the Appraisal Institute may also hold the following professional membership designations: SRPA, SREA and RM. The SRPA membership designation is held by appraisers who are experienced in the valuation of commercial, industrial, residential and other types of properties. The SREA is held by appraisers who are experienced in real estate appraising and analysis and who advise clients on real estate investment decisions. The RM designation is held by appraisers who are experienced in the valuation of single-family dwellings and in two-, three-and four-unit residential properties.

Inroads to a more unified profession

When the nation's two leading appraisal organizations, the American Institute of Real Estate Appraisers and the Society of Real Estate Appraisers, unified to form the Appraisal Institute, they took a giant step into a future charged with new opportunities for progress.

Unification represents a tremendous break from appraisal tradition. The sheer number of membership designations offered by leading appraisal membership designations confused the users of appraisal services and impeded the development of a cohesive leadership that the appraisal profession desperately needed. The January 1991 unification of the American Institute of Real Estate Appraisers and the Society of Real Estate Appraisers was a major step toward professionalism in the appraisal industry.

Integrating appraisal professionals

Most Appraisal Institute members are also licensed or certified appraisers in accordance with their state's laws. Having achieved the highest level of appraisal expertise, these individuals are especially interested in keeping appraisal standards high. For this reason, the Appraisal Institute created the State Accredited Affiliate Program, which is now available to state licensed and certified appraisers. This State Accredited Affiliate status entitles appraisers to certain benefits previously available only to Appraisal Institute members.

State Accredited Affiliates of the Appraisal Institute are encouraged to participate in Appraisal Institute activities and keep abreast of changes in the appraisal profession through continuing education courses, seminars and publications. Affiliation provides excellent opportunities to build relationships with professional colleagues in the community through chapter and regional functions.

The events that led to appraisal reform will continue to shape the way appraisers and potential appraisal clients interact. As the December 31, 1991 deadline for licensing and certification draws near, the Appraisal Institute will continue to support those policies it believes further the professional advancement of appraisers and protect the public's investments in real estate. To accomplish this, lenders and appraisers must work together to establish meaningful appraisal guidelines and ensure the proper implementation of FIRREA. With a strong dose of cooperative leadership, the financial and real estate markets might well make it down the road to recovery.

Richard G. Pietrowitz, SRPA, is senior vice president of BK Appraisal Service, Inc., Gibbsboro and Hackensack, New Jersey. An appraiser for 30 years, he is the 1991 president of the Appraisal Institute and specializes in the valuation of commercial, industrial and multifamily properties and condemnation and tax appeal assignments.
COPYRIGHT 1991 Mortgage Bankers Association of America
No portion of this article can be reproduced without the express written permission from the copyright holder.
Copyright 1991 Gale, Cengage Learning. All rights reserved.

Article Details
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Title Annotation:Affiliated industries; real estate appraisal industry and the Appraisal Institute
Author:Pietrowitz, Richard G.
Publication:Mortgage Banking
Date:Nov 1, 1991
Words:2477
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