New Technology and Old Requirements; What Needs To Be Enhanced, Modified or Put Out to Pasture. Chuck Dannis Richard Knitter

- Technology is rapidly changing how appraisers work. Are appraisal requirements keeping pace? What enhancements need to be made? - If USPAP sets the minimum requirements for an appraisal report, how can there be two sets of minimum report requirements (Appraisal Report and Restricted Appraisal Report)? Should Restricted Reports be retired? 2

- What would happen if the Development Standards (“identify the intended use”) were combined with the Reporting Standards (“state the intended use”) into a single Standard (“identify and state the intended use”)? - Currently the Scope of Work for an assignment excludes how the appraiser communicates their opinions to the client. Is this not part of the work on the assignment? 3

- After law school, attorneys can practice law after passing their exam. Appraisers need to have “years of experience” before being certified or licensed. Why the difference? Can what is learned from “years of experience” be taught using new technology to get new appraisers into the profession? -Currently the threshold for an acceptable appraisal is to “not mislead”. Is this the best that we can do? 4

This seminar is offering solutions updating appraisal requirements, recognizing the integration of new technology and having the appraiser provide new services. 5

Survey Audience Commercial / Residential Appraisers / Reviewers / Clients / Regulators First Time to National AI / Veterans 6

25 years ago when the current basic set of appraisal requirements were written, appraisers were using typewriters and hard copy forms, taping photographs on paper, and pressing the calculation button on ProJect and then going to lunch waiting for it to finish “computing three iterations”. Orange text – the issue Blue text – alternative solution 7

Current threshold that must be met in USPAP’s Standard 2 for all reports is to “not mislead”. Is this the correct threshold to have all appraisal reports adhere to? What if “Appraiser John stated that he produced a biased, low-ball appraised value to try and lower a tax assessment”, is this not misleading and alright to do? 8

Suggestion: Appraisers have to be independent, be honest, be impartial, be without advocacy, be objective, demonstrate professional competence, exercise due care, and maintain confidentially. Appraisers must document their analysis, opinions and conclusions clearly in a credible manner without bias to their client. This underlying basic premise does not change for any appraisal assignment. 9

Would it be helpful to have a single page in USPAP that an appraiser could provide to their potential clients to summarize USPAP’s expectations in the appraiser-client relationship? 10

Would it help if there were a single page in USPAP for some “clients”? For Appraisal Clients: For any assignment that requires or requests an appraiser to adhere to USPAP, the following conditions must be adhered to: -the appraiser must be independent and prepare their valuation independently. -the appraiser must be without bias. -the appraiser must be objective. 11

-the appraiser must not be hired contingent upon developing or reporting predetermined results. -the appraiser must not be compensated for completing the assignment contingent upon the development or reporting of a predetermined value or direction in value that favors the cause of the client, the amount of the value opinion, the attainment of a stipulated result, or the occurrence of a subsequent event directly related to the intended use of this appraisal. The appraisal client shall not interfere with the appraiser to complete their assignment independently, without bias, to be objective, and exercise competency. 12

The appraisal client cannot hire an appraiser contingent upon developing or reporting predetermined results. The appraisal client must not compensate the appraiser for completing the assignment contingent upon the development or reporting of a predetermined value or direction in value that favors the cause of the client, the amount of the value opinion, the attainment of a stipulated result, or the occurrence of a subsequent event directly related to the intended use of this appraisal. The appraisal client can not withhold payment of the appraiser’s fee due to the valuation conclusion presented by the appraiser. 13

Hypothetical Condition and Extraordinary Assumption A Hypothetical Condition is a special assumption utilized in an appraisal that assumes something exists that you know does not exist. An Extraordinary Assumption is a special assumption utilized in an appraisal that assumes something is known when it is not known. 14

Joe Homeowner is entitled to get a copy of the appraisal three days before closing. Should Joe Homeowner be an intended user or be able to rely on the valuation conclusion when they are paying for the appraisal and getting a copy by law (judges surely go with the common sense answer)? From an actual case - “The judge concluded, Anderson (appraiser) knew about Mustafa’s involvement as the buyer of the property, and Anderson would assume the buyer would rely on its report.” 15

Per current USPAP – “A party receiving a copy of an Appraisal Report in order to satisfy disclosure requirements does not become an intended user of the appraisal unless the appraiser identifies such party as an intended user.” A court has ruled - “When the appraiser knows that a party is going to receive a copy of the appraisal report by legal requirements, then that party is an intended user.” Common sense dictates that a known, required recipient of the report would be an intended user but this is not the current requirement. 16

Should USPAP’s Scope of Work include how the assignment results are communicated to the client/reporting? Currently, Scope of Work in USPAP does not address communication or reporting. Per RICS / IVS – Scope of Work must address: … - description of the report. 17

With the upcoming increase in Valuations for Financial Reporting (VFR), is USPAP written to appropriately address this client need? -Auditors are now required to review and concur with audited appraisal opinions (some appraisers had been using Restricted Appraisal Reports for VFR and this can no longer be done). 18

The Issue of “Draft” Reports: How Should USPAP address this issue? -If the appraiser submits an opinion of value and then revises the value, the rationale for changing the value must be clearly documented in the workfile. All communications to the client with opinions of value must be dated and documented in the workfile. 19

Draft Reports – Continued -Federal Rules of Discovery do not require “draft” reports to be kept as part of the material relied upon in developing the opinion. Why should USPAP differ? 20

Currently USPAP includes “what an appraiser’s peers actions would be in performing the same or a similar assignment.” - Consider improving the enforceability of this concept. Add ‘body of knowledge” to the test of the acceptability of an appropriate scope of work; consider deleting “what an appraiser’s peers’ actions would be” as there is no recognized source to find the actions of peers and following the lead of a group of bad appraisers is not good practice. 21

Scope of Work Acceptability Change - Replace the current 2 tests with: -recognized methods and techniques prescribed in peer-reviewed, published appraisal books and articles, and state- approved appraisal courses; 22

If USPAP is setting the minimum standards for an appraiser to follow in preparing an appraisal, why is there a need for more than one level of report format? If there is more than one level of report format for an acceptable appraisal, how does this protect “public trust” and is one report format better than the other report format? Is the restricted report format of “just trust me” a good idea? 23

Restricted Appraisal Reports An appraiser can write a restricted appraisal report to Bob, to Ted, but not to Bob and Ted. “warns that the rationale for how the appraiser arrived at the opinions and conclusions set forth in the report may not be understood properly …” Retire Restricted Appraisal Reports. 24

What good or harm would there be by combining the development standard with the reporting standard? Standard 1 “identify the client and other intended users” Standard 2 “state the identity of the client and other intended users” Alternative – Identify and state the identity of the client and other intended users. 25

What Clients Need Verses What Appraisers Must Do -Establish a pure client panel of experienced lenders, investors, regulators, and other users of appraisal services to opine as whether or not the current USPAP requirements serve the needs of the appraiser’s consumers. -Setting listing prices for potential sellers, market rent reports, helping buyers, … 26

Improving use of the USPAP Book -Length (Re-written and simplified) -Complexity (Canada’s USPAP is under 80 pages; IVS rewrote theirs and reduced its length by over 50%) -Top FAQ’s (Retire to an online database the other 300-plus FAQ’s) -Link to defined words/terms -Combine Development and Reporting Standards would reduce USPAP by 40% 27

- Practical guidance on proper applications using real world examples. An example would be how to do edits to a report and be USPAP- compliant or doing an update and being USPAP-compliant; engagement letter sample; responding to a reviewer’s request to change out the sale comparables; … 28

Attorneys can practice law after passing their exam. Appraisers need to have “years of experience” before being certified or licensed. Why the difference? Can what is learned from “years of experience” be taught using new technology to get new appraisers into the profession? Replace years of experience requirement to be licensed/certified with a competency exam. 29

Summary of Recommendations -Retire Restricted Appraisal Report -Improve the threshold for an acceptable appraisal report above “not to mislead”. -Have Scope of Work include how the assignment results are communicated to the client. -Combine Development and Reporting Standards. -Replace years of experience requirement to be licensed/certified with a competency exam. 30