The evolution of appraiser ethics and standards.
Clear, enforceable ethics and standards are one of the bases for a profession. It is the knowledge among practitioners of what the profession and society expects in terms of ethical behavior and competent performance that is the foundation of professional conduct. Some of our ethical concepts date back to the founding of professional appraiser organizations in the 1930s. Others were introduced along the way, influenced by outside events, This article looks at key events in this evolution of ethics and standards from the 1930s to today.
In February of 1986, John J. Leary, MAI, entered the first meeting of the Ad Hoc Committee on Uniform Standards, which was made up of nine North American appraisal organizations; he had with him two rather odd documents. The first consisted of big sheets of paper with excerpts of appraisal standards from various appraisal organizations pasted on them. The second was a copy of the newly adopted Standards of Professional Practice of the American Institute of Real Estate Appraisers (AIREA), but with a twist: every reference to the AIREA or its designations had been blanked out. Leary had a plan. He was about to find out if it was to be successful.
Moving Toward a Consensus on Professional Standards
Back in December 1981, John Leary had received a phone call from AIREA Regional Vice President, Thomas F. Quirk, MAI. The AIREA was forming a new committee that would be charged with formulating proposed AIREA appraisal standards. Would he serve on it?
The first task of this committee would be to completely revise the AIREA Standards of Professional Practice. After reviewing the history of appraisal standards and different modern formats, the committee adopted the format of Standards Rules, Explanatory Comments, and Guide Notes. With the format agreed upon, the committee turned its attention to individual standards.
Essentially starting with a clean sheet of paper, the committee created Standard 1, covering development of the appraisal opinion, and Standard 2, covering reporting. AIREA's Governing Council adopted the new standards in May 1985.
These new AIREA standards were very well received. Spurred by congressional inquiries related to the savings and loan crisis and, in part, by the publication of the new AIREA standards, an effort was begun by the Society of Real Estate Appraisers (SREA) to develop a set of uniform appraisal standards that could be used throughout the profession. Led by the SREA, an ad hoc committee was convened made up of representatives from other appraisal organizations, including AIREA. The group came to be known as the Ad Hoc Committee on Uniform Standards.
The first meeting of the Ad Hoc Committee on Uniform Standards (Ad Hoc Committee) was held in February 1986, with John Leary as the AIREA representative. While planning for the first meeting, Leary had an idea. He had learned that the legal staff of AIREA had several student interns working under the direction of staff attorney, Debra Anthony. At his suggestion, they cut the new AIREA standards apart and pasted the various provisions up on big sheets of paper. They then cut up the standards from the other appraisal organizations and pasted them up under the corresponding provision in the AIREA standards whenever they found common language. Just before the meeting, Leary contacted Bonnie Glass of the AIREA staff and asked her to take a copy of the new AIREA standards, blank out every reference to AIREA and make copies on legal-size paper for editing purposes.
Leary passed out copies of the pasted up standards to all the delegates. It was immediately obvious to all present that there were no significant conflicts between the various sets of standards and that only a few unique items existed. By noon of the first day, the Ad Hoc Committee had agreed to adopt AIREA Standards 1 and 2 as the initial text for the new Uniform Standards.
Between the first and second meetings of the Ad Hoc Committee, Ritch LeGrand, MAI, SRA, the SREA delegate, made a significant contribution to the effort by rearranging the text of Standards 1 and 2 according to the order of events in the valuation process and by suggesting that separate standards be developed for the appraisal review process (later Standard 3) and appraisal consulting process (later Standards 4 and 5).
The Ad Hoc Committee continued drafting Standards 3 through 10 based on the outline of Standards 1 and 2. Six weekend meetings and several interim edits later, in April 1987 the Final document, now titled "Uniform Standards of Professional Appraisal Practice" (USPAP), was completed. By the end of 1987, all the participating organizations had formally adopted USPAP, subject to their own codes of ethics.
The Ad Hoc Committee decided not to tackle the issue of codes of ethics, because it believed it would be too difficult to get full agreement. However, the Ad Hoc Committee, in hopes that the proposed Appraisal Foundation would eventually be formed, wrote a letter to the future Appraisal Standards Board of The Appraisal Foundation and sealed it in an envelope. In the letter, the Ad Hoc Committee recommended that the first course of action for a new Appraisal Standards Board (ASB) should be to develop a uniform code of ethics for USPAP.
The Appraisal Foundation was established in November 1987, and its Appraisal Standards Board adopted the Uniform Standards of Professional Appraisal Practice on January 30, 1989.
Thus, January 30, 1989 can be thought of as the start of the modern era in appraisal standards. Many of the concepts that appear in our modern codes of ethics and standards of professional practice, however, are decidedly not modern in their origins. Many date back to the original codes of ethics of the appraisal organizations formed in the early 1930s, while others arose because of professional controversies, new appraisal issues, governmental actions, and even social movements.
To understand how we arrived at the modern era, we need to go back to the 1930s and explore the origins of appraisal ethics and standards. From that point we can trace the development of these concepts up to the present day.
The 1930s--Origins of American Appraisal Ethics and Standards
The two appraisal organizations that were formed in the 1930s in the midst of the Great Depression, AIREA and the Society of Residential Appraisers (later to become the Society of Real Estate Appraisers [SREA]), would unify nearly 60 years later to form the Appraisal Institute. When the merger occurred in 1991, the Appraisal Institute adopted the Code of Professional Ethics of the AIREA as its Code of Professional Ethics. Both precursor organizations, of course, had already adopted the USPAP as their standards of professional practice. Therefore, this article will trace the history of the AIREA Code of Professional Ethics, although many of the same issues could be found in the SREA Code of Ethics as well.
It is surprising to learn how far back many of the current ethical and standards rules go. In fact, today's appraisers reading the first AIREA Rules of Professional Ethics (Rules), published in 1933, would find much that is familiar. (1) Topics such as contingent fees, predetermined values, referral fees, conflicts of interest, confidentiality, jurisdictional exceptions, reporting standards, and certifications were all addressed in the 1933 Rules in ways that are similar to their treatment today.
Other topics might seem familiar, but further reading would reveal that they were interpreted or applied quite differently than now.
For example, appraiser independence was an issue in 1933, as now, but in a very different context. At that time the concern was over collaboration between appraisers. Specifically, Article IV of the Rules provided that appraisers retained to prepare independent appraisals of the same property should not collaborate, and appraisers retained to jointly appraise a parcel of real estate should not issue separate appraisals.
Advertising was also addressed in that first ethics code and was quite severely restricted. The only advertising permitted was a "business-card" type ad with limited content or a listing in a directory that could display the MAI professional designation.
Other ethics rules would be familiar to us, but today we would consider them to be appraisal development or reporting standards. A list of reporting standards appeared in that first ethics code along with a certification addressing conflicts of interest and contingent fees.
A few of those early provisions, however, we might find a bit more baffling, such as rules restricting the development of fractional appraisals and summation appraisals. As it turns out, many of the issues we consider to be self-evident today definitely were not settled issues at the time and were the subjects of heated debate.
Fractional appraisals were one of these contentious issues. At the 1932 AIREA Convention in Cincinnati, several papers were presented on this topic. Common practice at the time was for a borrower to retain a real estate appraiser to appraise the land of an office building as if vacant. The borrower would then retain an architect or engineer to prepare an estimate of the reproduction cost of the improvements less physical depreciation. These fractional appraisals would then be added together (often without regard for highest and best use or consistent use) and submitted to a lender for a loan--with predictably disastrous results.
Summation appraisals were similar--various realty components were valued separately (by the same appraiser) and added together to represent the market value of the whole, again, often without consideration of consistent use of the various parts. This practice was responsible for many overvalued loans and resultant foreclosures. Nonetheless, K. Lee Hyder, AIREA Vice President and Chairman of the Education and Research Committee, argued in a 1932 convention paper that fractional and summation appraisals should not be banned:
I believe that we should demand that every appraisal show the value of land as vacant, the estimated cost of the improvements (accurately established by a properly priced bill of quantities and not on a cubic foot "guess"); and that the condition and utility of such improvements be fully reported upon.
Hyder gave three reasons to support his case. First, it was necessary in order to obtain "full knowledge of every element comprising an operating property." Second, he argued that "the appraiser who is most familiar with the land and the economic situation is not at all competent to determine what investment would be required in constructing the improvements in question; to measure its condition and utility; or to estimate its remaining life." The third reason given by Hyder was that courts often required these appraisals. On this last point he quoted a 1930 New York Supreme Court decision that is openly skeptical of the income capitalization approach:
When one considers the nature and purpose of a loan, he is forced to the conclusion that the valuation of the security should be based on physical-tangible property, and not on some unsubstantial, fanciful or ephemeral intangible. (2)
Hyder feared that the proposed rules went too far and might even bar all use of the cost approach, leaving only the capitalization of future income as the basis for loan, valuations. He argued, "In the final analysis, the proper basis of value for an investment property, where it is to be used to determine the security for a loan, is the Fair Market Value. Normally, this would be limited by the cost of replacement (summation method, so-called), or the expectation of income capitalized--whichever is the lower."
These arguments were not just over principles, but also over the practicality of the proposed ethical rules that the new AIREA hoped would correct appraisal abuses and help to bring stability to the markets.
In the end, the 1933 Rules banned fractional appraisals for loans but permitted appraisals of fractional parts of a property for other purposes, requiring a statement that the value reported would be invalid if used in making a summation appraisal of the property. Summation appraisals were permitted if it was shown that no incompatible conditions were assumed. (3)
This issue comes down to us today in the current USPAP Standards Rule SR 1-4(e), which requires appraisers to consider the effect on value of the assemblage of various parts of a property and to refrain from valuing the whole solely by adding together the values of the various parts.
Article I of the 1953 Rules addressed the acceptance of bonuses, favors, or special inducements. It barred an appraiser from accepting any compensation other than a "fair professional fee for the responsibility entailed and the work and expense involved." The point was to prevent bribery to influence the appraisal. The Rule recommended use of "the schedule of charges for appraising adopted by the local member Real Estate Board" as the proper standard for payment, a practice that would get the immediate attention of the Federal Trade Commission if proposed today! This issue is addressed today in the certifications that neither the engagement nor the compensation was contingent on developing or reporting predetermined results.
A review of articles on the topic of ethics, and of at least one edition of the Code of Professional Ethics for each decade, reveals examples of how many ethical and standards issues arose from events of the times.
Role of Great Depression
The very existence of the Appraisal Institute can be attributed to the Great Depression and its devastating effect on real estate. An example of this can be seen in a 1956 article in The Appraisal Journal by George Coffin, Jr., MAI, entitled, "The High Cost of Low Cost Appraising," (4) where the author bemoans the poor state of the appraisal profession, particularly those practitioners who produce poor-quality work for low fees. Coffin blames many of the financial losses of the Depression on "inexpert services and untrained valuation judgments" resulting in foreclosures and economic loss. He also points out that "many of the formerly accepted valuation theories were hopelessly insufficient and in many instances faulty." Coffin goes on to say the following regarding analyses of failed properties:
These studies have revealed in many cases that the properties which caused the downfall of institutions were good even under the most distressed of market conditions; the fault could be directly traced to fictitious and wholly unwarranted valuations which became the basis for exorbitant loan commitments ... I mean to lay stress of thousands of properties which, had they been properly evaluated before excessive loan commitments were made would have remained sound security during every period of the depression ... The indiscriminate use of reproduction cost as a major determining element of value has been the cause of scores of foreclosures.
By the late 1930s, Appraisal Journal articles were emphasizing the importance of both competency and integrity. For example, Harry Grant Atkinson points out in his 1939 article entitled, "Professional Ethics," that "being ethical is synonymous with being worthy of respect and confidence," (5)--a sentiment that might have come straight from the 2006 edition of USPAP. In a proposal that presaged the organization of today's Code of Professional Ethics, Atkinson discusses ethics in terms of relationships with clients, relationships with the public, and relationships with fellow members of the profession and with the professional body.
The Depression prompted the founders of the AIREA, the SREA, and other organizations, such as the American Society of Appraisers and the American Society of Farm Managers and Rural Appraisers, to take responsibility for implementing solutions by focusing on education, ethics, standards, appraisal principles, and acceptance of the duty to serve the public. These became models for the way appraisers should conduct themselves in challenging and difficult environments.
By 1942, the Rules of Professional Ethics had been refined in terms of its language, and a new article had been added. Article XII, entitled "Relations with the Institute and Fellow Members," addressed member conduct, and it is the precursor to today's Canon 2 of the Appraisal Institute Code of Professional Ethics. Interestingly, however, much of this article dealt with unfair competition with other members, particularly price competition--a topic that is completely off-limits to professional organizations today.
The Postwar Years
The postwar years saw the beginning of significant additions to the Rules. For example, by 1952 a record-keeping rule had been added. This rule required a written report with a copy retained in the appraiser's files "which shall be delivered to the Governing Council of the Professional Ethics Committee on request for the purposes of any investigation of the professional conduct of the member." The rule did not specify how long the file had to be maintained.
Also by 1952, Article XII had been amended to include a competency rule. This provision (although much shorter) is very much in keeping with the current Competency Rule in USPAP. It stated,
It is unethical for any member to accept an appraisal assignment without having had previous experience and/or general knowledge of such character as to qualify him to accept such an assignment unless either:
a. He has associated with him in the making of the appraisal an appraiser who has had experience in the valuation of the type of property under appraisement, or
b. Unless the facts are fully disclosed to the client.
It is interesting to note here what appears to be the first use of the term appraisal assignment in the Code of Professional Ethics.
It is also interesting to note that by this time several of the original prohibitions against price competition and other unfair methods of competition had disappeared from the document.
Condemnation Comes to the Fore
By the late 1950s, the issue of advocacy, particularly in condemnation appraisals, had become a major topic of discussion in articles relating to ethics.
The construction of highways, and especially the Interstate Highway System under the Federal Highway Act of 1956, as well as burgeoning demand for appraisals for urban renewal projects brought many appraisers into the field of condemnation appraisal. The rapid growth of these sectors, for a time, outstripped the ability of professional appraisal organizations to train and support their members. In some cases, the appraisers testifying on behalf of the property owners or the condemning agencies reached widely divergent opinions of value of the same property. Pressures from property owner's attorneys and improper instructions from condemning agencies combined with inexperienced appraisers were often the cause of these divergences. This problem was the subject of several Appraisal Journal articles from 1955 through 1958.
In a 1955 article by Philip W. Kniskern, MAI entitled, "The Difficulties and Menaces in Professional Practice," (6) the author credits the AIREA for what the organization was "about to undertake; namely through a study of actual cases to find out why, and at the same time how to reduce, the differences which sometimes develop between the opinions of individual appraisers of the same property as of the same time." This study, conducted by the newly formed Appraisal Review Committee that Kniskern chaired, led to the establishment of an appraisal review system that endured into the early 1980s. Under this system, whenever members of the Appraisal Institute appeared opposite each other in court testimony, they were required to submit their appraisals to the Appraisal Review Committee for review. Any possible ethical violations identified in the review would be referred to the Ethics Committee for further action.
The concept of public trust was discussed in a 1956 Appraisal Journal article by Jefferson E Steiner entitled, "Ethics in the Appraisal Profession." (7) This concept is now well established and is prominently featured in the Preambles to the current Appraisal Institute Code of Professional Ethics and to USPAP. As Steiner points out,
Through the years, appraisers--in and out of the Institute--have struggled to increase public trust and confidence ... Today we hold in our busy, clumsy hands the fragile container in which is entrusted to us a high measure of public acceptance ... The pioneers who won for us our present status of dignity, of public respect and of responsible effectiveness; rightly expect us to preserve this social privilege both for our own enjoyment and for those who follow after us.
By the end of the 1950s, the ethical code had expanded significantly from its original three pages. In 1958, the Governing Council of AIREA adopted these rules as Regulation 10, Standards of Professional Conduct, "for the purpose of relating certain improper acts of professional conduct to the Institute's Code of Ethics."
A number of important new ethics rules were added during the 1960s.
One new rule made it unethical "for an appraiser to render an improperly and inadequately developed opinion of value." This rule can be compared with current ER 1-1(d) in the 2006 Code of Professional Ethics, which states, "It is unethical to knowingly contribute to the development, preparation or use of an appraisal, appraisal review, appraisal consulting or real property consulting analysis, opinion or conclusion that reasonable appraisers would not believe to be justified."
Another rule from the 1960s introduced a prohibition against bias, stating "It is unethical for an appraiser to render an appraisal deviating from an unbiased and objective opinion of value whether to accommodate the interest of his client or for any other reason." Today, this prohibition continues on as ER 3-1, which states, "It is unethical to knowingly contribute to or participate in the development, preparation, use or reporting of an analysis, opinion or conclusion that is biased."
Fee competition among members was still a topic to be addressed in 1962. A rule still made it unethical "for a member to enter into competitive bidding for appraisal assignments when the member has reason to believe that the work is to be awarded to the lowest bidder." This rule would be gone within a decade.
The 1970s--A New Look and Departure Arrives
A major revision of the Code took place in 1970. During the late 1960s, the U.S. Department of Justice targeted the AIREA and several other organizations for special inquiry and possible charges relating to issues of antitrust. Because the revocation of a member's designation could be interpreted as the equivalent of removing the member's ability to earn a living, the Code of Ethics and particularly its enforcement became central to this issue. Of great importance was the assurance that the Code of Ethics was fair and that members received due process when they were charged with a violation. The challenge was to devise a system that guaranteed due process but was not so cumbersome as to make enforcement impossible.
After satisfying the Department of Justice that no antitrust issues factually existed, attention turned to a major revision of the Code of Ethics and its enforcement procedures.
Anyone reading the current Code of Professional Ethics, would find the 1970 Code of Professional Ethics, with its newly designated Standards of Professional Practice and its seven canons, quite familiar. Five of the canons correspond directly to the five canons of the 2006 Code of Professional Ethics, although they are not in the same order, and two correspond to Standards 1 and 2 of USPAP. Even more striking than the organization is the content of the 1970 Disciplinary Rules (as they were then called), which were very similar in content to today's Ethical Rules.
The 1970 overhaul of the Code was certainly the most-sweeping, radical change in the document since the original code was written in 1933. Many modern concepts were introduced and many archaic ones disappeared. The rule that originally prohibited fractional appraisals, now extensively rewritten, was beginning to look like the current SR 1-4(e) of USPAP, which prohibits the valuation of the whole solely by adding together the individual values of the estates or component parts.
For the first time, departure from some of the rules was permitted, subject to disclosure in the report. The result was referred to as a "limited appraisal assignment."
Limited appraisal reports were also permitted, again subject to disclosure to the client and in the report. The Code provided that the contents of such a report could not be so limited that the results would not be meaningful to the client or the public.
The canon dealing with competency (today we would refer to this as a development standard) included a list of nine appraisal guidelines, most of which now appear in some form in Standard 1 of USPAP.
As U.S. appraisers were refining their professional standards, an interest in standards was also growing overseas. The development of appraisal standards was an ongoing issue in Europe during the 1970s and resulted in the Statement of Appraisal Standards for the European Economic Community.
Counseling vs. Discipline
By 1982, a new canon, Canon 6, had been added to the Code making it a violation of ethics for a member or candidate who has specific knowledge of the Standards of Professional Practice to deliberately fail to observe those requirements in the performance an appraisal. This reflected a profound change in philosophy by the AIREA regarding the disciplining of members for violations of competency or reporting requirements (those topics covered by Canons 7 and 8).
Prior to this time, all violations of the Code of Ethics and Standards of Professional Practice had been subject to disciplinary action by the AIREA. Controversy had arisen over whether the AIREA should recognize a fundamental difference between violations that involved ethics--that is, those involving issues of honesty and integrity--and those that involved standards--that is, those resulting from mistakes or carelessness. The decision was made that violations involving issues of honesty and integrity (ethical violations) would be subject to disciplinary actions by the established procedures, but that violations of standards (those involving mistakes or carelessness) could best be addressed by counseling the Member. The philosophy was that honest appraisers who make a mistake should not be punished, but instead should be counseled to help improve future work product and protect the public. Canon 6 was written to address the appraiser who repeatedly violated the Standards of Professional Practice, even after being counseled. It made such a violation one of ethics, not of standards.
Review and Counseling Committees were established to perform this function. Made up of volunteer members, the structure of these committees mirrored that of the Grievance Committees that investigated possible violations of Ethical Rules. Review and Counseling Committees investigated cases, interviewed the subject member, and issued formal counseling reports.
Societal changes are also reflected in the 1980s editions of the Code. Gender-specific language was removed; no longer would the document refer (as did the 1972 edition) to "men of integrity and independent judgment." Also, the practice by lenders of redlining, or denying loans in racial-minority neighborhoods, prompted three related appraisal guidelines on the topic, one of which stated, "In performing a real estate appraisal assignment, it is improper to base a valuation of a particular parcel or tract of real estate or a conclusion with respect to neighborhood trends, upon stereotyped or biased assumptions relating to race, color, religion, sex or national origin" [Guideline 3 of Canon 7, Regulation No. 10, 1982.]
A comment to the guidelines addressed the substantial impact that social change has had upon appraisal theory and practice over the years.
For example, it was once common practice for an appraiser to examine the racial, religious and ethnic composition of a neighborhood in an effort to detect any sign of nonconformity or change. This approach is now regarded as misdirected and the use of factors relating to the racial, religious or ethnic composition of a neighborhood in arriving at a conclusion of value or in projecting value trends is now deemed an unreliable practice. As with other types of change, there is no reason to believe that social change will cease to have an impact upon appraisal theory and practice.
In the 1980s, an even broader change was beginning to have an effect--the globalization of the appraisal profession. The year 1981 marked the founding of the International Valuation Standards Committee (IVSC), which included AIREA President Don Dorchester, MAI, as a member. The IVSC would go on to develop the International Valuation Standards that would, in many ways, parallel the AIREA standards.
The Modern Era and the Creation of USPAP
The savings and loan (S&L) crisis was perhaps the defining economic event of the 1980s. The S&Ls, which had been around since the 1800s and had operated within a tightly regulated environment, were substantially deregulated in the 1980s. The S&Ls, which previously had been limited to residential loans, were suddenly able to make commercial loans, issue credit cards, and compete directly with banks. In many cases, these institutions were taken over by new investors who operated them in a free-wheeling manner, making risky loans in property types and regions of the country where they had no experience. Large numbers of these loans went bad and many of these institutions failed, with an ultimate cost to the U.S. government of more than $125 billion. (8)
Investigations revealed fraud and illegal actions by many parties, including lenders and appraisers. One result of this was the 1989 passage of the federal Financial Institutions Reform, Recovery and Enforcement Act, commonly known as FIRREA. The Act referenced The Appraisal Foundation as the source for appraisal standards and appraiser qualifications and ensured the wider adoption of the new set of appraisal standards known as the Uniform Standards of Professional Appraisal Practice or USPAP.
For more than 50 years, codes of ethics for appraisers had been developed and refined to the point where changes to ethical rules came only infrequently. From this point on, the focus would be on the refinement of appraisal standards.
In the first years of USPAP, changes came frequently as the Appraisal Standards Board worked to further develop USPAP. Beginning in 1993, a new edition of the standards came out every January with a midyear supplement every July--changes every six months. By 1996, the rate of change slowed sufficiently so that the midyear supplement could be dropped and changes would occur only once a year.
Among the major changes were development of a code of ethics for USPAP called the Ethics Provision (1989) and the adoption of the three reporting options (1994). The concept of scope of work was in the original USPAP (then called the scope of appraisal in Standards Rule 2-2f), but it was not until 2006 that the Scope of Work Rule would replace the Departure Rule.
By 2005, the ASB felt that the standards were developed enough to permit an 18-month publication schedule for USPAP, and in 2006 they announced that starting with the 2008 edition, new editions would occur on a two-year schedule. This decision is a reflection of the growing maturity of the appraisal standards and their need for less frequent modification.
Since the creation of The Appraisal Foundation, the profession has benefited from having a nearly full-time Appraisal Standards Board that is compensated, supported by professional staff, and can devote considerable time over a long period to considering and resolving the many issues that are raised regarding appraisal standards. The Appraiser Qualifications Board has assisted this process by developing a system of training and certifying a cadre of instructors to ensure that knowledge of the standards among practitioners is as widely held as possible.
In 2006, in recognition of the fact that its members are increasingly impacted by the global economy and work for clients who engage in business across national borders, the Appraisal Institute adopted changes to its Standards and Ethical Rules to allow members to perform appraisal assignments under the International Valuation Standards when appropriate. Also in 2006, the International Valuations Standards Committee and The Appraisal Foundation issued a memorandum of understanding, known as the Madison Agreement, in which both entities committed to the ultimate goal of a single set of understandable and enforceable global valuation standards.
Clear and enforceable ethics and standards are one of the bases for a profession. It is the knowledge among practitioners of what the profession and society expects of them in terms of ethical behavior and competent performance that is the foundation for professional conduct.
Today, many appraisers feel that their ethics are under assault from clients who expect favorable assignment results in return for future business. This is particularly difficult for appraisers who receive large portions of their business from a few clients. Even so, the pressures appraisers feel today are little different from those of the past; only the characters and the settings change. It is not fair, and never has been, that appraisers must sometimes face the hard choice between a reasonable livelihood and maintaining high ethical standards. It is the duty of those who find themselves in this uncomfortable situation to seek clients who desire ethical and professional services; easier said than done--granted. Ultimately, to the extent that appraisers stand up to these pressures, they may risk loss of needed income, but to the extent they do not, we risk loss of the profession.
Appraisers live daily with constant tension between their need to be successful in business and their responsibility to the ethical behavior necessary to secure the public trust. A profession is judged by the success of its practitioners in fulfilling these two, sometimes-conflicting goals. Our history teaches us that we have many models of successful and ethical appraisers to follow. As we look back at the evolution of our ethics and standards over 75 years of Appraisal Institute history, we can see that these issues were of great importance to the founders. We owe a debt to those who defined our profession as well as to those who continued to work through the years to give us the system of ethics, standards, and enforcement that we have now. Perhaps nothing is as important to the future of our profession than the diligence and seriousness we employ in incorporating these ethics and standards into our daily lives.
Some of our ethical concepts, such as conflicts of interest and predetermined values, date back to the founding of the organization in the early 1930s. Others were introduced along the way, influenced by events such as the Great Depression and the construction of the interstate highway system and its attendant litigation. Still others came by way of social movements or economic events. Our resultant Code of Professional Ethics and Standards of Professional Practice reflect both immutable concepts of right and wrong, and the more changeable mores of society.
Rules Of Professional Ethics *
Article I. Contingent Fees
SEC. 1. It is unethical for an appraiser to accept an order to appraise a property if his employment or fee is contingent upon his reporting a predetermined or specified amount of value, or is otherwise contingent upon any finding to be reported.
SEC. 2. It is unethical for an appraiser retained in cases where damages resulting from the exercise of the right of eminent domain, or resulting because of fraud, misrepresentation, etc., to make his compensation contingent upon the amount of, or to fix his compensation as a percentage of the damages which may be decreed by the Court deciding the issues in the case involved.
SEC. 3. It is unethical for an appraiser to accept an assignment to appraise a property when such assignment involves a bonus, a favor, or any special inducement other than a fair professional fee for the responsibility entailed and the work and expense involved. The schedule of charges for appraising adopt ed by the local member Real Estate Board is recognized as a proper standard of payment and should be followed. If there is no minimum fee established by the Ideal real estate board, the fee should be reasonable for service rendered and within the bounds of good business practice. Taking advantage of a client discredits the entire real estate profession.
Article II. Commissions and Favors
SEC. 1. It is unethical for an appraiser to accept any commission, favor or emolument, in connection with the appraising of a property, other than a fair professional fee for the responsibility entailed and the work and expense involved.
Article III. Disinterested Appraisals
SEC. 1. It is unethical for an appraiser to issue an appraisal report if he is acting or intending to act in the capacity of broker, loan broker or manager, or if he has an ownership, contemplated future ownership, or any other interests in connection with the property appraised, unless such interest or interests be fully disclosed in the appraisal certificate.
Article IV. Independent Appraisals
SEC. 1. It is unethical for appraisers who have been retained to make independent appraisals of a property to collaborate or consult with one another with reference to the appraisal, or to make use of "the findings or figures developed or reported by any appraiser so retained.
SEC. 2. It is unethical for appraisers who have been retained to collaborate in the making of an appraisal to issue, separate appraisal reports on the property, appraised. They should sign a joint report, or if there be dissenting opinions these opinions should be stated in the report rather than in separate documents apart from the report.
Article V. Hypothetical Appraisals
SEC. 1. It is unethical for an appraiser to issue an appraisal report on an investment construction project with such value predicted on assumed rentals and/or expenses at variance With the probable market at the time at which the reported value obtains.
SEC. 2. It is unethical for an appraiser to issue an appraisal report, on an investment property based on an earning expectancy which does not analyze existing leases.
Existing leases, until their expirations may apparently increase or decrease the net earnings of the property above or below the net earnings which would be realized were the space feinted at the market rates existent at the time the reported value obtains.
SEC. 3. It is unethical for an Appraiser to issue an appraisal report in which the reported value is based on the completion of public or private improvements which are not assured unless he clearly states that the appraisal is made on that hypothesis. Provided that, in any event, he must state in his report the conditions with regard to such improvements which he assumes in determining the value reported.
SEC. 4. It is unethical for an appraiser to issue an appraisal report in which the reported value is based on the assumed absence of any legal restriction, unless such assumption is reasonable or in accord with legal opinion accepted by the appraiser, and unless the legal authority and his opinion are quoted in the appraisal certificate, and it is expressly stated that the appraisal is contingent on such lawful restriction being changed or absent in accordance with the assumption.
Article VI. Fractional Appraisals
SEC. 1. It is unethical for an appraiser to issue an appraisal report on a fractional part of a property unless he specifically states that the value reported is invalidated if used in making a summation appraisal of the property as a whole.
SEC. 2. In appraising the security for a loan it is unethical for an appraiser to issue a certificate covering anything less than all of the property designated as security for the loan.
SEC. 3. In particular, in appraising the security for a leasehold loan, it is unethical for an appraiser to issue a certificate of value of the improvement only, omitting the value of the leasehold, which latter may be positive, zero, or negative.
Article VII. Summation Appraisals
SEC. 1. It is unethical for an appraiser to issue an appraisal report on a property in which the total reported value is derived by adding together the values of fractional parts of the property unless it is shown that no incompatible conditions were assumed in making the fractional appraisals.
SEC. 2. In particular, in appraising the security for a loan, it is unethical for an appraiser to issue an appraisal report on a property in which the total reported value is derived by adding together the market value of the land, (or leasehold) as if unimproved, or the value of the laud (or leasehold) as if improved to the highest and best use, and the reproduction cost of the improvements less accrued structural depreciation, unless other and conclusive evidence is given that this result equals the total value of the property considered as a unit.
Article VIII. Economic Probabilities and Value of Investment Property
SEC. 1. It is unethical for an appraiser to issue an appraisal report on an investment construction project and report such value as of normal occupancy without also reporting the assumed date of normal occupancy and his estimate of net earnings or deficits during the period from completion to normal occupancy.
SEC. 2. If the value reported is the value which in the opinion of the appraiser will prevail when normal occupancy is attained, it is unethical for the appraiser to report the value as of any other than the date when it is assumed such normal occupancy will have been attained.
SEC. 3. It is unethical for an appraiser to issue an appraisal report on an investment construction project which does not give the appraiser's opinion on the economic soundness of the project, as measured by the difference between the estimated net cost up to the completion and the value at completion.
SEC. 4. It is unethical for an appraiser to issue an appraisal report on an investment construction project without also reporting his estimate of the reasonably expected earnings of the project upon completion as well as upon attaining the assumed normal average occupancy.
Article IX. Duty To Hold Findings Confidential
SEC. 1. It is the duty of an appraiser to hold as confidential the fact that he has been employed to make an appraisal, his results and other findings, until released from his obligation by the client or by due process of law.
Article X. Expert Testimony
SEC. 1. In giving testimony as to the value of real property in any court or before any other legally constituted tribunal an appraiser may follow rules of procedure as to appraisal method legally binding in that jurisdiction even though such rules may be at variance with the provision of these Standards.
Article XI. Contents of Appraisal Certificates
SEC. 1. It is unethical for an appraiser to omit any of the following from his appraisal certificate.
A. An unequivocal and reasonably complete description of the property appraised.
B. A statement of any contingent conditions upon which this appraisal has been based. For example: (a) the validity of legal, engineering, or auditing opinions used; (b) the completion of projected public or private improvements; (c) that the management will be competent and the ownership be in competent hands.
C. A statement classifying the property appraised as an investment property, a non-investment property, or a service property.
D. The date or time at which the value obtains.
E. The amount of the value.
F. A statement that the undersigned appraiser has no present or contemplated future interest in the property appraised; or a statement disclosing all such interests which the undersigned appraiser may have in the property appraised.
G. In case the property appraised is a fractional part of the property of a type covered by these Standards of Practice, a statement that the value reported is invalidated if used in making a summation appraisal of the property as a whole.
H. A CERTIFICATE, substantially in the following form:
I, (WE) the undersigned do hereby certify that to the best of my (our) knowledge and belief the statements and opinions contained in this appraisal certificate, subject to the limiting conditions herein set forth, are correct; also, that this appraisal has been made in conformity with the Standards of Practice of the American Institute of Real Estate Appraisers of the National Association of Real Estate Boards.
I. A statement that the appraiser's employment is not contingent upon the amount of the value reported, and (in the event the appraisal is used in cases of litigation involving the fixing of damages caused by exercise of the power of eminent domain, or in cases involving damages because of fraud, misrepresentation, etc.) is not contingent upon the amount of damages awarded by arbitrators or through judicial decree.
Article XII. Advertising
SEC. 1. It is unethical for a Member of the Institute to advertise his professional attainments or services through the mails, in the public print, by circular letters, bill boards, or window advertising, or by any other written word except that a Member may cause to be published in the public press what is technically known as a "card".
A card is hereby defined as an advertisement of the name, professional titles including M. A. I., (Member of the American Institute of Real Estate Appraisers of the National Association of Real Estate Boards) class of service, address of the advertiser, without any other qualifying words or letters or, in the case of announcement of change of address, the plain statement of the fact for the publication of which the announcement purports to be made.
Cards permitted by this rule when appearing in newspapers shall not exceed two columns in width and three inches in depth; when appearing in magazines, directories and similar publications, cards shall not exceed one-fourth page in size. This rule shall not be construed to inhibit the proper and professional dissemination of impersonal information among Member's own clients or personal associates or the properly restricted circulation of bulletins containing professional information.
SEC. 2. It is ethical, however, for an appraiser of the Institute to carry an announcement in the classified telephone directory as follows: "JOHN DOE, M.A.I., Address, Telephone Number" under the subdivision REAL ESTATE APPRAISALS.
* Reproduced from the Journal of the American Institute of Real Estate Appraisers (July 1933): 368-370.
Canons of the Code of Professional Ethics of the Appraisal Institute *
CANON 1 A member must refrain from conduct that is detrimental to the Appraisal Institute, the profession, and the public.
Canon 1 Comment
Public confidence and trust in the Appraisal Institute, Members, and the profession is essential to the well-being of our society and the global economy. The Appraisal Institute serves a vital public need by educating and training professionals concerning real property, by conferring professional membership designations on individuals who meet stringent requirements, and by conducting peer review that enhances the quality of Members' work product, and disciplines and deters unethical conduct. In turn, the services of Appraisal Institute Members foster economic growth and stability. If a Member engages in conduct that is detrimental to the Appraisal Institute, the profession, or the public, the Member undermines the public confidence and trust that is necessary for the Appraisal Institute, Members, and the profession to perform their vital roles in our society and the global economy.
CANON 2 A member must assist the Appraisal Institute in fulfilling its role relating to member qualifications and member compliance with ethics and standards.
Canon 2 Comment
The Appraisal Institute serves a vital public need by conferring professional membership designations on individuals who meet stringent requirements and by conducting peer review that enhances the quality of Members' work product, and disciplines and deters unethical conduct. As a result of these programs, the public associates Appraisal Institute membership with a high degree of professional integrity and a commitment to professionalism. To facilitate these critical objectives and maintain the reputation of the Appraisal Institute and its Members, a Member must preserve confidentiality in admissions matters and peer review proceedings, fulfill committee responsibilities, cooperate with appropriate committees, prepare and preserve their workfiles, and ensure that they do not place themselves in a position where they cannot comply with the Code of Professional Ethics & Standards of Professional Appraisal Practice.
CANON 3 In providing services (appraisal, appraisal review, appraisal consulting, or real property consulting), a member must develop and report unbiased analyses, opinions, and conclusions.
Canon 3 Comment
Given the role that Members serve in our society and the global economy, the public interest demands that each Member develop and report unbiased analyses, opinions, and conclusions. Therefore, Canon 3 and its associated Ethical Rules prohibit a Member from rendering an analysis, opinion, or conclusion that is not reasonably supported and that favors or promotes the cause or interest of the client, Member, or another. The Ethical Rules associated with this Canon prohibit Members from developing and reporting biased analyses, opinions, and conclusions and address how a Member must handle issues that may offer an incentive to provide biased analyses, opinions, and conclusions or can create a perception that analyses, opinions, or conclusions are biased. The Ethical Rules set forth requirements concerning how a Member must address situations where a client requests a predetermined analysis, opinion, or conclusion as a condition of engaging the Member; where the Member has a personal interest in the subject or outcome of the service or with respect to the parties involved; and where the Member acquires an interest in property or assumes a position that could possibly affect the Member's judgment. The Ethical Rules also provide requirements relating to contingent fees, hypothetical conditions, and extraordinary assumptions. Actual and perceived bias can undermine the confidence that the public and clients must have in the integrity of Members.
CANON 4 A member must not violate the confidential nature of the member-client relationship.
Canon 4 Comment
Confidentiality is a critical component of any relationship between a professional and a client. For a Member providing services, confidentiality fosters full and candid disclosure of relevant information by the client. Such disclosure enables the Member to provide credible analyses, opinions, and conclusions to the client.
The client has a legitimate interest in controlling the disclosure of confidential information, analyses, opinions, and conclusions in part because the client pays for services rendered and because the disclosure of such information, analyses, opinions, and conclusions may harm the client. At the same time, a Member must be able to use market data and, at the Member's option, provide other Members and the profession with access to such data, to serve the public and clients generally.
To facilitate these objectives, the Appraisal Institute has adopted a definition of confidential information and a series of Ethical Rules relating to and protecting the confidentiality of the Member-client relationship.
CANON 5 A member must not advertise or solicit in a manner that is misleading or otherwise contrary to the public interest.
Canon 5 Comment
To serve the public and clients effectively, members of a profession must not only offer their expertise, but they must also properly and accurately inform the public and prospective clients about their qualifications and the functions of the profession. In this way, prospective clients can make informed decisions as to the type and extent of services they need and can identify competent and ethical professionals to provide such services. Such information can also help clients evaluate a service and help hiring parties evaluate potential employees or contractors. Advertising, solicitations, promotions, resumes, and statements of qualifications that are misleading or are otherwise contrary to the public interest undermine these important goals.
* This text effective January 1, 2003. For the full text of the Code of Professional Ethics of the Appraisal Institute, including definitions, Ethical Rules, and Ethical Rule Comments, see http://www.appraisalinstitute.org/membership/downloads/cpe/ 2003_C_of_P_E.pdf.
by Bruce M. Closser, MAI, SRA
(1.) See Appendix I for the full text of the 1933 Rules of Professional Ethics, and Appendix II for the text of the current Canons of the Code of Professional Ethics of the Appraisal institute.
(2.) People v. F. H. Smith Co., 230 A.D. 268, 243 N.Y.S. 446 (July 1, 1930).
(3.) See Article VI, "Fractional Appraisals," and Article VII, "Summation Appraisals."
(4.) George H. Coffin, Jr., "The High Cost of Low Cost Appraising," Journal of the American Institute of Real Estate Appraisers (January 1936): 7-12. Note that the name of the Journal was officially shortened to The Appraisal Journal in April 1939, although members and readers had referred to the Journal by this shortened name for some time.
(5.) Harry Grant Atkinson, "Professional Ethics," The Appraisal Journal (April 1939): 159.
(6.) Philip W. Kniskern, "The Difficulties and Menaces in Professional Practice," The Appraisal Journal (July 1955): 334-340.
(7.) Jefferson F. Steiner, "Ethics in the Appraisal Profession," The Appraisal Journal (October 1956): 618-526.
Bruce M. Closser, MAI, SRA, CRE, is a state-certified General Appraiser. He has been a full-time professional appraiser in Marquette, Michigan, since 1970. He has taught and developed numerous courses and seminars for the Appraisal Institute, including the Standards of Professional Practice course, where he served as chief reviewer and course developer. He has also served on the Appraisal Institute's National Education Committee, as chair of the Curriculum Committee and as a member of the Technology/Curriculum Study Group. He is past chair of the Appraisal Standards Council of the Appraisal Institute. He also has been an assistant director of screening for the Appraisal Institute since 2003, working with the director of screening in screening appraisals that are referred to the Appraisal Institute for investigation of possible ethics or standards violations. Closser has served on two councils of The Appraisal Foundation. Since 2003, he has been the Appraisal Institute's representative to The Appraisal Foundation Advisory Council, a council made up of appraisal organizations and government agencies that advises the Appraisal Standards Board; he currently serves as its chair. He also was the Appraisal Institute representative to the Education Council of Appraisal Foundation Sponsors (ECAFS), which is responsible for developing the national USPAP courses for The Appraisal Foundation, and was its chair in 2002 and 2003. From 2001 to 2004 he also was chair of the Exam Committee of ECAFS. Closser was the 1994 recipient of the Appraisal Institute's Charles B. Shattuck Award for "outstanding contributions to the advancement of appraisal knowledge"; the 1998 recipient of the Appraisal Institute's William N. Kinnard, Jr. Award "in recognition of his many contributions to appraisal education"; and recipient of the Connie Vickroy Award from the Great Lakes Chapter of the Appraisal Institute "for his significant contributions to our chapter and to the Appraisal Institute." Contact: firstname.lastname@example.org
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|Author:||Closser, Bruce M.|
|Date:||Mar 22, 2007|
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