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Survey of the effects of state certification on appraisers.

On August 9, 1989, President Bush signed the Financial Institutions Reform, Recovery and Enforcement Act of 1989 (FIRREA). The stated purpose of this act was to resolve the savings and loan (S&L) crisis and to provide for the future health of the industry. Title XI of FIRREA requires all appraisals accompanying federally related real estate transactions to be performed by state certified or licensed appraisers. In order to comply with this legislation, each state is in the process of implementing a certification and licensing program for its real estate appraisers.

The state of Ohio has implemented a two-tiered appraiser certification program; it is Ohio's program in particular that will be examined in this article, though some of the results will be relevant in other locales. The two levels of state certification are designated as certified residential appraiser, which equates to a licensed appraiser at the federal level, and general certified appraiser. Ohio's program became effective as of December 1, 1990, with the first test administered on May 11, 1991.

Requirements for a residential real estate appraiser certificate include completion of 2,000 hours of real estate appraisal experience and a score of at least 70% on the state examination.(1) Likewise, the requirements for a general appraiser certificate include 2,000 hours of real estate appraisal experience, at least half of which must be appraisals of real estate other than one-to-four-unit residential properties, and a score of 70% or above on the state examination.

PURPOSE

Because, as of this writing, the required state certification of appraisers is still in the process of being designed and implemented, the authors felt that it would be helpful to ascertain the opinions of a sample of individuals who have been certified. Their responses may serve as a basis of comparison with appraisers in other states that have differing requirements and as an indication of their reaction to some current issues. Specific topics that are examined include:

* The impact of faulty appraisals on the failure of financial institutions

* The impact of certification on the quality of appraisers

* The importance of professional designations and state certification in promoting lender confidence in the appraisal profession

* The effect of state certification on the number of appraisers, appraisals ordered, and appraisers' income

* The state certification process

To accomplish this task, a statewide survey was conducted in April 1992. The sample was randomly selected from the list of appraisers who had obtained certification in Ohio. After a number was selected from a table of random numbers and used to pick a starting place on the list, every fifth name was chosen.

Of 324 questionnaires mailed, 131 responses (40.4%) were usable in this study. Requests for a summary of results accompanied 75 (57.2%) of the responses. This indicates a strong interest in the outcome of the survey because appraisers were asked to include a business card or their name and address, which identified them when the survey was otherwise anonymous.

DESCRIPTION OF APPRAISERS

The appraisers in this study were asked to provide background information on their personal characteristics, professional designations, and appraisal practices. This information was used to determine which factors, if any, influence appraisers' opinions toward state certification.

Sex

Males accounted for 89.3% of the respondents and females 10.7%. The percentage of females may appear to be relatively low, but is believed to be representative of the proportion of women in the general appraiser population because of the random process used in the selection of the sample.

Age

Table 1 provides statistics on the average age of the appraisers and the distribution of age by quartile. The results indicate an average age of 47.5, which is in line with at least two earlier studies on appraisers.(2) The age for the sample ranges from 27 to 78, indicating along with the quartile distribution that there is a wide age span represented.

The mode for this sample is much older (50.0) than the two studies cited above. A difference between this study and the others that may account for the higher mode is that the other studies examined only individuals who had professional designations while this study included both individuals who had a designation and those who did not.

It is clear from Table 1 that 75% of the individuals who responded are over 40 years of age. This suggests that they either 1) have many years of appraisal experience, or 2) had some other occupation prior to becoming appraisers.
TABLE 1 Appraiser Age

Summary
Statistics Quartiles
Mean 47.5 First 27-40
Median 46.0 Second 41-46
Mode 50.0 Third 47-56
 Fourth 57-78


Years in practice

When the data are analyzed in terms of years of appraisal experience, the mean number of years of full-time appraisal work is 12.2 years. This indicates that the individuals who responded to the survey have worked in the industry prior to 1989 when FIRREA mandated state certification of appraisers, and thus have experience with which to judge the certification process.

The surveyed appraisers are grouped by the number of years of full-time experience into four categories:

* 0 to 5.99 years

* 6 to 10.99 years

* 11 to 19.99 years

* 20 or more years

Table 2 provides the percentage of appraisers in each of these categories. The fact that 84% of respondents have less than 20 years of experience seems to support the contention that they had some other occupation prior to becoming appraisers.

College degree

When appraisers were asked what their highest level of education was, 51.2% indicated that they have a bachelor's degree and 11.6% have a master's degree or higher. Several professional designations require at least a four-year degree, which may explain the fact that 61.8% of the respondents have at least a college degree. The level of education shown in Table 3 suggests that these appraisers are capable of performing the more rigorous, quantitative work currently required in appraisal reports. Further, it indicates the increasingly professional nature of the appraisal industry.
TABLE 2 Years in Practice

Number of Years Percentage of Respondents
0-5.99 29.8%
6-10.99 22.1%
11-19.99 32.1%
20 or more years 16.0%
TABLE 3 Highest Level of Education

Level of Education Percentage

High School Diploma 18.6%
Associate Degree 18.6%
Bachelor's Degree 51.2%
Master's Degree or Higher 11.6%


Professional designation

Respondents were asked to indicate the designations they currently hold and those for which they are a candidate. Table 4 lists the top 12 designations and the percentage of the appraisers in the sample that each represents. It should be noted that while most of those listed are from traditional appraisal organizations, some of the designations are offered primarily by Realtor organizations.

A minority of the appraisers in the sample (42.6%) holds a professional designation. As can be seen in Table 4, the three most commonly held designations are the SRA, the MAI, and the ASA.

Among the 58 individuals (44.3%) who are currently working toward a professional designation, the top three designations include SRA (48.3%), MAI (25.9%), and IFA (19.0%). In an earlier study by Clauretie, Bible, and Graham that appeared in the July 1989 issue of The Appraisal Journal just prior to the passage of FIRREA, the authors presented a survey of members of the American Institute of Real Estate Appraisers on regulation and certification.(3) They reported that 35% of their Louisiana-Mississippi sample thought that fewer appraisers would seek designations, 45% thought more would be likely to seek designations, and 20% thought no change in designation levels would occur. Clearly, their respondents were divided on this question.
TABLE 4 Professional Designations Held

 Percentage
Designation of Sample

Senior Residential Appraiser (SRA) 19.8%
Member Appraisal Institute (MAI) 11.5%
American Society of Appraisers (ASA) 7.6%
Certified Residential Appraisers
(CRA) 6.1%
Certified Real Estate Appraisers
(CREA) 5.3%
Senior Real Property Appraiser
(SRPA) 5.3%
Certified Appraiser Senior (CA-S) 4.6%
Certified Appraiser Residential (CA-R) 3.8%
Graduate Realtor Institute (GRI) 3.8%
Master Senior Appraiser (MSA) 3.8%
Residential Member (RM) 3.1%
Independent Fee Appraisers (IFA) 3.1%


If state certification is required for all appraisers, then why should an individual seek a designation in addition to this approval by state authorities? Why would an appraiser submit to the additional cost, coursework, and testing if the state certification does not require a professional designation? The answer must be that an appraiser believes that there is an additional benefit to be obtained in seeking a designation.

In an effort to determine how the state certified appraisers in this study felt, those with a professional designation are compared with those without one to see whether they are working toward a designation. Table 5 shows the number of individuals for each combination.

A chi-square test is statistically significant at the .01 level, indicating that there is a statistical difference between those who have a professional designation and those who do not in predicting if they will work on a designation. Of the 58 individuals who report working on a designation, 42 (72%) do not currently have a designation and only 16 (28%) have a designation. Of those who do not have a designation (75), 56% are working on a designation.

The number of appraisers who do not have a professional designation and are working on one suggests that these individuals perceive that there will be an additional benefit to having the designation. These findings provide evidence that organizations offering professional designations should be able to attract candidates from among those individuals who earn state appraiser certification.

TABULAR DATA OMITTED

Type of State Certification

In Ohio, individuals can qualify for either a residential real estate appraiser certificate to appraise one- to four-family residential properties or a general appraiser certificate to appraise residential and all other types of property.

Residential certified appraisers account for 66% of those sent a questionnaire and general certified appraisers account for 33%, which are the corresponding proportions of all appraisers that have been certified in Ohio.

Of those who responded, general certified appraisers account for 45% of the total. Appraisers with the broader certification thus were more likely to return the questionnaire.

Current place of employment

Table 6 provides the current places of employment for respondents. While the majority (68%) works at independent fee appraisal firms, other types of employment are represented in the sample. This allows for a variety of viewpoints on the impact of certification.

Average appraisal in the sample

In terms of the preceding description of respondents to the questionnaire, the average appraiser in the sample is male, approximately 47.5 years old, and has 12.2 years of full-time experience in appraisal practice. He has a college degree and is currently working as an independent fee appraiser. At the present time, he does not hold a professional designation, but is working on one.
TABLE 6 Current Place of Employment

Type of Firm Percentage

Independent fee appraisal firm 68%
Combination appraisal/real
estate agency 14%
Savings and loan institution 8%
Commercial bank 3%
State/local government agency 3%
Insurance company 2%
Mortgage bank 2%


FAILURE OF FINANCIAL INSTITUTIONS

A series of 10 questions attempts to ascertain appraisers' opinions on a variety of issues facing the appraisal profession. The first two questions deal with the recent failures of financial institutions, which were blamed in part on faulty appraisals. First, respondents were asked their opinion on the extent of responsibility that faulty appraisals should bear for these failures. While the majority (69.5%) feel that faulty appraisals were somewhat responsible, 27.2% feel that they were hardly responsible or not at all responsible.

A follow-up question asks if the failure of financial institutions has hurt lender confidence in the real estate appraisal profession. A majority (64.9%) feels that the failures have somewhat affected lender confidence, 24.4% feel that failures have hardly affected or not at all affected confidence, and 9.9% feel that they have severely affected confidence.

The responses to these two questions were analyzed to determine any differences based on personal demographics such as age, sex, education, place of employment, or professional designation. No statistically significant differences were found, indicating that the majority of all respondents feels that faulty appraisals should bear some responsibility for the failure of financial institutions and that these appraisals have affected lender confidence in the appraisal profession.

QUALITY OF APPRAISALS

Impact of regulation on quality of appraisals

In an effort to determine if respondents believe that increased regulation of appraisers would change the quality of appraisals, two questions were posed. First, appraisers were asked if they think that the quality of real estate appraisals will improve with increased regulation. Although 62.6% said yes and 37.4% said no, the difference in response to this question is according to type of certification and the holding of a professional designation.

Those with a general certification believe 3.21 to 1 that regulations will improve appraisals, supporting the yes response. Those with a residential certification believe 1.06 to 1 that regulations will improve appraisals, or are about evenly divided between yes and no responses.(4) These results support comments made by some respondents that appraisals of commercial real estate were more to blame for the failure of the S&L industry than were residential appraisals.

Appraisers without a professional designation believe 2.41 to 1 that regulations will improve appraisals, supporting the yes response. Those with a professional designation believe 1.07 to 1 that regulations will improve appraisals, showing them to be about evenly divided.(5) The increased doubt on the part of those with a professional designation may reflect a viewpoint that regulation will not correct the problems encountered during the 1980s by the S&L industry. This analysis suggests that those with a general certification and those without a professional designation are more likely to perceive a positive relationship between regulations and an improvement in the quality of appraisals.

Certification and faulty appraisals

A second question asked respondents if they believe that state certification of appraisers will reduce the number of faulty appraisals. Table 7 provides the percentage for each of the four possible responses. A majority (67.9%) believes that faulty appraisals will be greatly reduced or somewhat reduced.
TABLE 7 Certification and Faulty Appraisals

Response Percentage

Greatly reduce 14.5%
Somewhat reduce 53.4%
Hardly reduce 13.7%
Not at all reduce 18.3%


When responses are analyzed based on whether the individual respondent has a professional designation, 55% of those with a designation believe that faulty appraisals will be greatly reduced or somewhat reduced versus 78% of those without a designation. Thus, those without a professional designation were more likely to answer affirmatively that state certification will reduce faulty appraisals.(6)

When the level of formal education is analyzed, 59% of those with at least a bachelor's degree believe that faulty appraisals will be greatly reduced or somewhat reduced versus 81% of those without at least a bachelor's degree.(7) This suggests that it is more likely that individuals believe that state certification of appraisers will reduce the number of faulty appraisals if they do not have a professional designation and/or do not have at least a bachelor's degree.

LENDER CONFIDENCE IN APPRAISERS

State certification and lender confidence

Respondents were asked if state certification will increase lender confidence in appraisers. Although 64.9% said yes and 35.1% said no, there is a difference in response to this question by education, number of years of experience as a full-time appraiser, place of employment, and professional designation. This question produced the most difference of opinion among the respondents, indicating a strong lack of agreement.

There are definite differences of opinion on this question based on the specific level of education that the individual has obtained. Individuals with a high school education (18.6%) believe .71 to 1 that certification of appraisals will improve lender confidence. Clearly, appraisers with a high school education do not think that certifying appraisers will contribute to lender confidence.

Appraisers with an associate degree (18.6%), believe 5.0 to 1 that certification will improve lender confidence. This represents the strongest positive view of any education level. Those with a bachelor's degree (51.2%) believe 1.64 to 1 and those with a master's degree or higher (11.6%) believe 4.00 to 1 that certification will improve lender confidence.(8)

Individuals who have less than 11 years of full-time experience believe 3.25 to 1 that certification will improve lenders' confidence. Those who have 11 or more years of full-time experience believe 1.1 to 1 that certification will improve confidence, and are basically divided on this issue.(9) Thus, appraisers with more experience are less convinced about the positive impact state certification will have on lenders.

The current place of employment is divided into independent fee appraisers (68%) and all other places of employment (32%). Independent fee appraisers believe 1.41 to 1 that certification will improve lenders' confidence. Those that are employed in all other places believe 3.67 to 1 that certification will improve confidence.(10) Recall that the other places category includes lending institutions such as savings and loans and commercial banks.

Those appraisers who do not have a professional designation believe 3.17 to 1 that certification will improve lenders' confidence. Those who do have a professional designation are evenly divided (1 to 1) about the effect of certification on lender confidence.(11) This result makes sense if it is assumed that those who do not have a designation hope that certification will improve their credibility with lenders.

The majority of appraisers appears to believe that state certification will improve lender confidence. Those who are likely to support this position include those with more than a high school education, with less than 11 years of fulltime appraisal experience, who are currently employed at some place other than an independent fee appraiser's office, and those that do not have a professional designation.

The majority of those with only a high school education does not believe certification will improve lender confidence. There is basically a division of opinion among those who have 11 or more years of full-time appraisal experience, independent fee appraisers, and those who hold a professional designation.

Professional designation and lender confidence

Respondents were asked if professional designations increase lender confidence. By the largest majority for any of the ten questions asked, 77.9% of appraisers said yes and 22.1% said no.

The only difference in answering this question is by age. Those in the youngest quartile (27 to 40 years) believe 17 to 1 that professional designations increase lender confidence. The other three quartiles believe 2.51 to 1 that designations increase lender confidence.(12) This finding suggests that organizations that offer designations should target those who are between the ages of 27 and 40, as they will be most likely to seek a professional designation.

Respondents were given an opportunity to write in the designations they believe increase lender confidence. The most commonly cited designations were MAI (51.9%), SRA (45.0%), ASA (12.2%), SRPA (6.9%), RM (6.1%), and IFA (6.1%).

CHANGES IN THE APPRAISAL PROFESSION

Changes in the number of practicing appraisers

Respondents were asked if they believe that state certification of real estate appraisers will change the number of practicing appraisers. The majority of appraisers (64.1%) believes that the number of appraisers will decrease, 12.2% believe the number will increase, and 22.9% believe there will be no change.

In the earlier study by Clauretie, Bible, and Graham, their Louisiana-Mississippi group had a lower percentage who thought there would be a decrease.(13) During the four-year period between the two studies, the requirements for state certification have become clearer. The Ohio appraisers may see the certification process as eliminating those individuals with less experience and knowledge of appraisal practices. Or they may believe that the process will discourage individuals who perform appraisals on a part-time basis because of the time, effort, and cost involved in obtaining certification.

The only difference in response to this question is between those who have a professional designation and those who do not have a designation. Table 8 lists the number for each response divided by professional designation and no professional designation.

Of the 75 appraisers with no designation, 74.6% believe that there will be a decrease in the number of appraisers versus 50.9% of those appraisers with a professional designation. Those without the designation may view the state certification as a barrier to entry into the profession that will result in fewer appraisers. Those with a designation are much more likely to believe there will be no change in the number of appraisers (34.5%) than those without a designation (14.6%).(14)

Changes in the number of appraisals ordered

When the appraisers were asked their opinion about possible changes in the total annual number of appraisals that will be ordered, three-quarters (75.6%) believe that there will be no change. Of the remaining appraisers, 17.6% believe that there will be an increase and 6.8% believe there will be a decrease. There is no difference in response to this question by any personal or professional characteristics, indicating that the majority of appraisers believes there will be no change in the number of appraisals ordered.
TABLE 8 Number of Appraisers and Professional Designation

 Increase Decrease No Change Row Total

No designation 8 56 11 75
Designation 8 28 19 55
Column total 16 84 30 130


Changes in income

A majority of appraisers (64.1%) believes that state certification will increase their income, 7.6% anticipate a decrease, and 27.5% foresee no change in income. The only difference in response to this question is based on whether the individual holds a professional designation. Of the 74 appraisers who do not hold a professional designation, 75.6% believe that appraisers' income will increase, while only 50% of those with a professional designation think an increase will occur. Only 17.6% of those without a designation believe there will be no change in income, while 41% of those with a designation hold this opinion.(15)

The majority of Ohio-certified appraisers in the sample believes that the number of appraisers will decrease, the number of appraisals ordered will not change, and that this will result in an increase in the income of appraisers. The only division of opinion on these results comes when the responses are analyzed according to whether respondents hold a professional designation.

METHOD OF STATE CERTIFICATION

Because the first examination for certification of real estate appraisers took place only recently, appraisers' opinions of the examination method should be current. When asked if they agreed with the state's method of certifying appraisers, 63.4% said yes and 36.6% said no.

Appraisers who do not have a professional designation agree 2.75 to 1 that the state's method of certification is correct. In contrast, those who do hold a professional designation are split (1 to 1) on whether the state's method is correct.(16)

Respondents were asked to suggest changes that they would make in the state certification process and several blank lines were provided. The most common comments focus on the difficulty of the examination, verification of appraisal experience, and the need for an apprenticeship. Almost all of the individuals who offered comments indicated that the exam was much too easy and should be made more rigorous. Specific comments include: "test was very basic--actually too easy," "increase difficulty of current examination," and "test could be a little more demanding."

Several appraisers felt that the state did not verify the required appraisal experience, making this requirement ineffective. They felt that the state should verify appraisal experience in a manner similar to that of the professional organizations in issuing designations. Comments on this subject included: "require at least 3,000 hours of experience," "increase experience requirements," "tougher standards," "samples of work could be a requirement," and "should verify appropriate and adequate experience."

Two quotations seem appropriate in summarizing the comments. First, one appraiser wrote that he believed "stricter rules and harder testing with some type of apprenticeship provision to enable younger appraisers to gain experience and proper tutelage under a certified appraiser," were in order, indicating possible future changes. Second, another appraiser wrote, "too soon to be critical," which is valid, given that only 30 of the 50 states have a program in effect as of this writing. The remainder of the states had until December 31, 1992, to get their certification process up and running.

CONCLUSION

A survey of Ohio-certified real estate appraisers explores their opinions on the newly implemented state certification process. While the majority believes that the process is correct, many offered suggestions for improvement, including an increase in the difficulty of the examination and an evaluation of appraisal experience that would be based on those used by organizations that offer professional designations.

Respondents believe that state certification will reduce the number of faulty appraisals, increase lender confidence, decrease the number of appraisers, cause no change in the number of appraisals ordered, and increase appraisers' income. It remains to be seen whether these positive benefits will actually materialize.

In addition, this survey indicates that appraisers who do not currently hold a professional designation are working toward one. This result suggests that state certification will not eliminate the need and desire for professional designations.

1. Ohio Revised Code, Chapter 119, Section 4763.03.

2. Barry A. Diskin, V. Michael Lahey, and Karen E. Lahey, "Appraisers' Utilization of Computer Technology," The Appraisal Journal (April 1988): 179-189. This study found the mean age of appraisers to be 48.0, the median 46.0, and the mode 39.0. See also American Inst. of Real Estate Appraisers, 1986 Membership Profile, AIREA Research Series Report 1 (Chicago: American Inst. of Real Estate Appraisers, 1986), 16. This study found the median age to be 48.4, the median to be 47.0, and the mode 38.0.

3. Terrence M. Clauretie, Douglas S. Bible, and Marshall F. Graham, "Appraisal Regulation and Certification: Appraisers' Views," The Appraisal Journal (July 1989): 317-326.

4. Chi-square test is statistically significant at the .01 level.

5. Chi-square test is statistically significant at the .05 level.

6. Chi-square test is statistically significant at the .05 level.

7. Chi-square test is statistically significant at the .05 level.

8. Chi-square test is statistically significant at the .01 level.

9. Chi-square test is statistically significant at the .05 level.

10. Chi-square test is statistically significant at the .05 level.

11. Chi-square test is statistically significant at the .01 level.

12. Chi-square test is statistically significant at the .05 level.

13. Clauretie, Bible, and Graham, 322.

14. Chi-square test is statistically significant at the .05 level.

15. Chi-square test is statistically significant at the .01 level.

16. Chi-square test is statistically significant at the .01 level.

Karen E. Lahey, PhD, is the Charles Herberich Professor of Real Estate in the department of finance, The University of Akron, Akron, Ohio. She received a BA in education from the University of Florida and an MBA in business administration as well as a PhD from Florida State University.

David M. Ott is a real estate appraiser at Summit Bank in Akron, Ohio. He received a BS in finance from The University of Akron, Akron, Ohio.

V. Michael Lahey is a consultant and owner of R.E. Data in Akron, Ohio. He received a BS in education from Florida Atlantic University, an MA in reading from the University of Georgia, and an MBA, in business administration from Florida State University as well as a ED.D from the University of Georgia.
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No portion of this article can be reproduced without the express written permission from the copyright holder.
Copyright 1993 Gale, Cengage Learning. All rights reserved.

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Author:Lahey, Karen E.; Ott, David M.; Lahey, V. Michael
Publication:Appraisal Journal
Date:Jul 1, 1993
Words:4632
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