Baby or Bath Water? And Is it Time to Take Back USPAP?
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About half of AICPA members don’t believe in USPAP…
When I first heard that “they” were trying to do away with the Appraisal Practices Board (APB) of the Appraisal Foundation (TAF), I tried to keep an open mind. I also wondered who “they” are.
Did the Appraisal Institute (AI) finally get a sympathetic ear in Congress? Was it preemptive action by the Board of Trustees in anticipation of budget cuts by the new administration?
By the way, what does the APB do? I certainly had it wrong. I thought they helped develop the Advisory Opinions (AOs)! To be candid the only time I ever think about their specific function is for passing USPAP update courses.
I’m grateful to Lisa Desmarais for pointing me in the right direction. Mrs. Desmarais is the only residential appraiser on the APB.
Before I write my perspective / apparent answers to the above let’s make sure we are all on the same page as to their function. So, what DOES APB do anyway?
The Appraisal Practices Board (APB) is the newest of The Appraisal Foundation’s three boards. The APB offers voluntary guidance to appraisers, regulators, and users of appraisal services on recognized valuation methods and techniques, emerging issues, and other topics that may arise for all valuation disciplines. The APB seeks to identify and provide examples of commonly accepted methods and techniques with evaluative commentary where appropriate. [source ASA Website].
It’s worth taking a look at the Appraisal Practices Board Valuation Advisories page.
To date, they have issued eight (8) advisories:
- APB VFR Valuation Advisory #1: Identification of Contributory Assets and Calculation of Economic Rents
- APB VFR Valuation Advisory #1: (Toolkit): Identification of Contributory Assets and Calculation of Economic Rents
- APB VFR Valuation Advisory #2: The Valuation of Customer-Related Assets
- APB Valuation Advisory #2: Adjusting Comparable Sales for Seller Concessions
- APB Valuation Advisory #3: Residential Appraising in a Declining Market
- APB Valuation Advisory #4: Identifying Comparable Properties – Revised
- APB Valuation Advisory #5: Identifying Comparable Properties in Automated Valuation Models for Mass Appraisal
- APB Valuation Advisory #6: Valuation of Green and High Performance Property: Background and Core Competency
- APB Valuation Advisory #7: Valuation of Green and High Performance Property: One to Four-Unit Residential
- APB Valuation Advisory #8: Collection and Verification of Residential Data in the Sales Comparison Approach
Those of us who are merely appraisers and NOT professional accountants will count the bullet items and arrive at the number ten rather than eight, or even nine.
It’s ok. Counting is just one more thing accountants and appraisers do differently.
If I haven’t lost you by this point, you already understand why so few people really understand what the APB does.
- The results are effectively hidden. Unlike USPAP which is put in our face daily you have to really make an effort to go find their work if all you can think of is Appraisal Subcommittee (ASC), or TAF as a starting point.
- Once you find “Valuation Advisories” (and you are a REAL ESTATE Appraiser rather than a ‘Valuator’) your eyes glaze over as soon as you see the first four items (2 if you are an accountant) covering three topics. Only one of which could possibly apply to real estate appraisers. Still with me?
IF you stuck with it and started reading the second number “2” item, or numbers 3-8 you can see that they (APB) really do a thorough and much needed job!
It’s far more than simple opinion paragraphs. They’ll take you through the issue from start to finish, and supply sound “how to” procedural answers.
I think their specific planned upcoming issues have a very limited potential audience. No one aside from a few fanatical environmentalists cares about Green or so called high performing commercial buildings, and VFR (NOT visual flight rules for aircraft pilots) is of interest only to accountants / ‘valuators’.
How about something relevant? Like Proper Review Appraisal Procedures? All appraisers, most regulators and possibly even accountants would benefit from this. Haven’t they ever wondered why ‘court case’ methodology is rejected out of hand by IRS?
Anyway, in my long winded way I’ve arrived at the real problem, and possible answer(s) to why the BOT suspended the activities of the APB.
When USPAP was envisioned under FIRREA, little or no recognition was given to the fact that real estate appraisal and nearly ALL other forms of ‘valuation’ differ dramatically. Expanding USPAP by reserving Standard Rule Sections for future inclusion of these other disciplines was a BAD IDEA to start with.
Yes, we all call certain approaches by the same name (sales comparison, cost and income) but that is where any similarity really ends. Adopting the accountants term ‘Valuator’ and ‘Valuation’ in lieu of ‘Appraisal’ failed to magically cause us to view our basic functions more similarly.
Example: To an appraiser ‘market derived rent’ is basically the amount that is verified to result from current open market lessor and lessee perceptions as evidenced by existing, current negotiated leases/rents, or current asking rates. The appraiser will knock on doors, check current listings or analyze actual leases for this information.
To the valuator, market rent is the dollar equivalent of the return required to provide the hypothetical Wall Street Investor the rate of return they demand (require). It only involves one side of the postulated market transaction: that of the investor.
For an apartment project Real Estate Investment Trust (REIT) data published ten, fifteen or even twenty years ago may be used to develop the ‘market rate’ of return required that will in turn be used to dictate what ‘market rent’ is.
In 2009 a very senior IRS “Manager” once answered my somewhat naive inquiry about why the American Institute of CPAs (AICPA) and Real Estate Appraisers don’t all just adopt USPAP? Her response is telling: “Because about half of AICPA members don’t believe in USPAP.” Had I really considered that statements impact I’d probably still work there, and her soon after retirement may not have been hastened.
Ongoing (failed) attempts to treat valuators and appraisers as if we are the same have failed. Worse, they have actually eroded rather than preserved or enhanced confidence the American People had or have in BOTH DISCIPLINES. THAT is contrary to the objective of FIRREA.[i]
It’s also grossly unfair to the professionals in both disciplines.[ii]
I think someone in Congress has finally realized it is time to stop torturing FIRREA, USPAP and appraiser / valuator practitioners alike. Real Estate Appraisal and Business Valuation are NOT the same! Whether the other disciplines are appropriately governed by FIRREA under the USPAP umbrella remains to be seen.
My sources in Washington, DC have proven trustworthy in all my past contacts with them. What appraisers, American taxpayers and consumers now face is far worse than the potential loss of ‘only’ the APB.
Probable elimination of Dodd-Frank (DF) is not a surprise, however the extent and impact of proposed provisions are.
Informed sources state in addition to DF repeal that GOP House Members and Senators are already drafting legislative language for the complete elimination of the ASC AND TAF! AI lobbyists are cheerfully going for a Grand Slam!
They haven’t been successful in getting alternative standards adopted nationally, nor have they gotten rid of the APB (seen as a potential alternative appraisal education source) but they and other interests are getting receptive ears in the area of complete elimination of FIRREA’s appraisal related and implementing provisions!
What we hear from the new Administration is that extensive though as yet undetermined scope changes will soon be forthcoming for all GSEs, along with a return to privatization and independence for FNMA and FreddieMac.
Cutting FNMA loose could be a good idea if they were cut completely loose and it is made 100% clear to all customers and investors that there is no and will be no backing by American taxpayers (ever again).
Not all of Dodd Frank and it’s Consumer Financial Protection Bureau were bad ideas. Admittedly enough are seen by the GOP as bad ideas so that its likely both will disappear.
As was once pointed out by our former President, “elections have consequences.” The pendulum of political equilibrium has now swung in the opposite direction. That’s OK. Our system of governance was designed for this exact concept.
Dodd Frank included two absolutely critical requirements to promote & preserve the integrity of appraisal: non interference with appraisal independence and reasonable and customary fee requirements.
As Congress rewrites major legislation dealing with America’s financial security my only hopes are that they will do so (as far as feasible) in a bipartisan manner and in a way that considers what is best for taxpayers instead of special interests.
FIRREA, USPAP, the ASC and TAF as well as ALL its Boards are critical to maintaining or enhancing real estate ‘appraisal’ credibility in America. Only accounting / valuators can decide if they also have a need for USPAP. BUT TAF should limit its attention to real estate appraisers and appraisal!
In any event, please don’t throw the baby out with the bathwater!
[i] California Accountancy Board administers CPA licensing in that State. There is NO REQUIREMENT for USPAP knowledge; CE courses or to follow USPAP in CPA practice according to their state CPA licensing board. USPAP does NOT apply to business valuation practice.
[ii] Other appraisal disciplines appear to be more adaptable & consistent with USPAP.