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The profession ... ensuring it is a profession. (Viewpoint).

LICENSING AND CERTIFICATION of real estate appraisers has had a significant impact upon the appraisal profession. It is the view of many--and a view I share--that licensing and certification undermined the professionalism of the appraisal profession.

Other factors have certainly had an impact, but inadequate requirements for licensed and certified appraisers exacerbated other factors, such as technological changes, commoditization of residential lending and increasing standardization of even non-standard mortgages.

The Appraiser Qualifications Board proposes to significantly increase the qualifications requirements for licensed and certified appraisers, a proposal that the Appraisal Institute supports. The education requirement would be nearly doubled--to 140 hours for licensed residential appraisers, 200 hours for certified residential appraisers and 315 hours for certified general appraisers. In addition, the AQB proposes to implement a required core curriculum and require that new applicants have a bachelor's degree or meet other education requirements.

For appraising to be considered a profession, these changes are critical. Prior to licensing and certification, designations were an effective means of identifying professionals--those who had made a commitment to higher educational levels, standards of professional practice and a rigorous code of ethics. With licensing and certification at the low level initially established, the meaning of the designations was diminished; the market moved to the minimum level required and the reputation of the appraisal profession suffered accordingly.

The AQB's proposal is a major step forward, but other changes are also needed. For example, better enforcement at the state appraisal board level, a reexamination of whether or not the original intent of FIRREA is being met, regulation of the relationship between the client for appraisal services and the appraiser (i.e., client pressure, predatory lending, etc.), and the need for better understanding of US PAP by appraisers and clients. Some of these issues will be addressed in the General Accounting Office's study of the appraisal regulatory structure, while others are being handled by The Appraisal Foundation and the professional appraisal organizations.

For example, on the client pressure issue, Appraisal Institute Vice President for Public Affairs Don Kelly has initiated a program with banking organizations to develop a "best practices" statement for the relationship between clients and appraisers. While a "best practices" statement will not stop client pressure, failure to adhere to the statement adds to the evidence that pressure has occurred.

On the issue of USPAP understanding, The Foundation's national USPAP course and instructor certification program help ensure consistent understanding of USPAP.

These are important steps in re-establishing and building the credibility of the appraisal profession. However, these are simply reactions to what is. In order to truly be a profession, the Appraisal Institute and other professional organizations must look to the future.

Mortgage lending remains the largest market for appraisal services--about 80 percent of residential and over half of commercial appraisal fees come from mortgage lending. However, the mortgage lending market has been changing rapidly over the years. Technology, the availability of data, and the ability to use more sophisticated analytic techniques, along with the issues of timeliness and quality for typical mortgage appraisals, are driving a change in collateral risk management Already as much as 20 percent of that market may be handled through a "Price opinion" and automated valuation products.

The changes occurring in residential mortgage lending are now happening in commercial mortgage lending as well. Automated valuation models for commercial properties are now available, and data sources have expanded rapidly.

Mortgage lending will not disappear as a source of business for appraisers, but the kinds of products and services that appraisers provide for mortgage lending transactions will inevitably change. Commercial and residential appraisers who do mortgage lending appraisal work--which will continue to be a major source of business--must be prepared to: offer a variety of services ranging from "appraiser price opinions" to full narrative reports on complex and unique properties; specialize in an identifiable market niche; or diversify to ensure sufficient related business.

At the same time that mortgage lending is changing, other markets for valuation services are emerging. In particular, mark to market (valuation for financial reporting purposes) will offer tremendous business opportunities, as firms and government entities begin to reflect market or current cost values for assets in financial reports. However, this business will also require new services; for example, market value in a financial reporting context generally focuses on value in existing use rather than under a presumption of highest and best use.

As the Appraisal Institute's Wall Street initiative made clear, and the "Main Street" surveys at the chapter level are bearing out, the market knowledge and experiences that appraisers have are important resources. But the services needed are often not the traditional services we have provided. As professionals, it is time to step forward to meet the demands of the marketplace. Appraisers have been defined too narrowly in terms of the appraisal report, whether in narrative or standardized form format.

There are two key actions that must be undertaken: first, the market for valuation services must be redefined. There should be no room in the market for a "broker" price opinion; instead, appraisers should offer an "appraiser" price opinion. Those who do statistical analyses of real estate and other asset values should be recognized for their particular expertise and be made part of the profession. The profession being the application of economic analysis to determining value of assets, which should not be confused with the asset type. Real estate is an asset, not a profession. Valuation of real estate is a discipline within a larger valuation profession.

Second, the needs of each party in a transaction (including a financial report as a transaction) should be analyzed, and the valuation profession should respond to those needs with appropriate products and services. Mortgage lending will be driven by principles of risk management-including collateral risk management; appraisers should think of and define their products and services in terms of ensuring that their clients manage their risks appropriately and effectively. Property buyers and sellers, property owners, and regulatory agencies each have unique needs related to the value of assets, and the appraiser's training as an applied economist with special expertise in valuation can serve those unique client needs.

The Appraisal Institute is leading the profession in taking these actions. Each of our programs and projects-ranging from the databases and data standards to the Mark to Market (valuation for financial reporting purposes) and Wall Street to Main Street initiatives are specifically designed to make the appraiser an important part of asset decision making and risk management. For our members, this translates to the markets recognizing that MAIs, SRPAs and SRAs are the choice for real estate solutions. That is the focus of our promoting and advertising: the growing part of the market that really wants to know the value, as opposed to meeting regulatory compliance requirements.

The issues are, of course, larger than just residential, commercial and industrial real estate, and success for the valuation profession requires that we work with other professional organizations with particular specialties. The Alliances Initiative, where we are looking at how the various professional organizations can work together, and the Centre for Advanced Property Economics, which focuses on the critical and controversial issues such as environmental liability, corridor valuation and mark-to-market issues, are two key initiatives for working across the profession. Our international efforts-with the international Valuation Standards Committee in particular-are designed to reinforce the direction we are taking in the United States, and have been successful in establishing issues such as mark to market as relevant.

As the world for appraisal professionals grows more complex, decisions need to be made, and actions taken, by appraisers in their businesses and by professional societies individually and jointly, as we wrestle with the challenges of being a profession. It is an exciting time to be in the appraisal profession.
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Author:Ross, John W.
Publication:Valuation Insights & Perspectives
Geographic Code:1USA
Date:Mar 22, 2002
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Next Article:Mold: the hidden menace. (Insurance Connection).

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