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Understanding Competency

By Tim Andersen, MAI, MNAA and J. Nathan Pippin, MNAA

In the COMPETENCY RULE, there are four (4) components to an appraiser’s competency.  Therefore, competency requires (emphases added):

• The appraiser’s confirmation that, prior to agreeing to perform an assignment, that s/he can perform the assignment competently;
• The appraiser to have the ability to properly identify the problem to be addressed;
• The appraiser to have the knowledge and experience to complete the assignment competently; and
• The appraiser to recognize, and comply with, any and all laws and regulations that apply to the appraiser or the assignment.

This essay explains the COMPETENCY RULE. At first glance, the COMPETENCY RULE appears to apply to the three standard approaches to value. It also requires the appraiser to understand protocols, procedures, and applications.  It means the appraiser knows and understands the protocols behind making specific adjustments, as well as when a particular protocol or approach is applicable.

Competency requires the appraiser to know what to do in any appraisal situation, and then to execute that knowledge in way that is both timely and proper.  Further, thru his/her logic & reasoning, judgment & execution, that appraiser leads the client/intended user to a conclusion(s) the market-facts and market-evidence firmly and clearly support.

Finally, the competent appraiser knows and understands that merely going thru the motions of an appraisal does not develop a credible appraisal, nor does reporting it in a non-misleading manner.  Merely to go thru the motions is only filling in the blanks on a form; it is not to appraise.  Competency requires the appraiser to know how and why s/he developed the assignment results in the way s/he did.  Competency requires the appraiser to understand the development of that appraisal so intimately s/he can communicate it to the CIU in a clear, concise, and non-misleading manner.

Consider square footage differences.  Since it is generally impossible to find two houses that essentially are the same but for a square footage difference, paired-sales extraction of this particular adjustment, while applicable, is not practical.  Regression analysis (RA) would likely yield a practical coefficient for this difference.  However, not all appraisers are familiar with the data requirements of regression analysis, nor how to interpret properly the RA’s output.  So, we need another protocol by which to derive the square footage adjustment.

One protocol (although not the only protocol) to determine this adjustment is to look at the Cost approach.  If the market supports a replacement cost new of $140 per square foot, and the market shows the subject property has accrued depreciation of 35%, then the adjustment for size differences is $140/SF X 0.65 = $91/SF.  Therefore, the size adjustment would be approximately $91 per square foot, an adjustment the market supports.

Therefore, the competent appraiser, prior to accepting an assignment, already knows the protocols of making an adjustment (i.e., how to calculate it) such as this one, when to make it, and why it was necessary to make.  Furthermore, the competent appraiser can, if necessary, explain that adjustment cogently to a non-appraiser. 

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Next is the appraiser’s ability to address properly the appraisal problem.  In other words, the competent appraiser knows that different clients have different problems, and the appropriate and market-supported solutions to each of them can and will vary from assignment to assignment.

Consider a typical 1,800 square foot, three-bedroom, two-bath house with a two-car garage in a typical neighborhood.  The zoning does not permit auxiliary dwelling units.  The market demands a two-car garage (400-ish square feet).  Assuming this house was the highest and best use of the site as improved, this would be a straightforward residential appraisal assignment, right?

Now, let’s complicate the matter.  Assume the same neighborhood and house, but the current owners have converted the two-car garage into a one-bedroom mother-in-law (MIL) apartment with a full [albeit small] kitchen, small living room, full bath, full insulation, full HVAC, full plumbing, full electrical, and so forth.  Assume, as well, the owners did this without the proper permits, thus the improvements are illegal. The owners now want to put the house on the market and have hired you to give them an idea of (a) a listing price, as well as (b) its market value. Given these qualifications and requirements, consider these questions (which the essay will not answer, since that is your job as the appraiser):

• Does this house have three- or four-bedrooms? Why?
• Does this house have two- or three-bathrooms? Why?
• Does this house have one or two kitchens? Why?
• Is this an 1,800 square foot house, or a 2,200 square foot house? Why?
• Does the fact the current owners installed the MIL without the proper permits affect the property’s highest and best use as improved? Why?
• Does the fact the property in its present condition does not have a 2-car garage affect its listing price? Why?  Its market value?  Why?
• Which form will you use to report the findings of your appraisal, the standard single-family residence form, or a multi-family form? Why?

Not only do appraisers demonstrate their competency by answering these questions, appraisers demonstrate it by furnishing the why.

Knowledge is a function of education, training, study and mentoring, both from the bases of qualifying education as well as continuing education.  Experience is a function of the time the appraiser spends in the field actually appraising properties, as well as the types of properties the appraiser appraises.  While all appraisers must accrue these qualifications in order to be a competent appraiser, not all knowledge and experience are equal, or even applicable.

Now, consider the appraiser who has carved out a niche appraising duplexes, tri-plexes, and four-plexes, but not single-family residences.  This appraiser will have taken classes on the appraisal of such properties.  The appraiser’s mentors will have shown the appraiser how to appraise them.  This appraiser likely will have consulted with peers on the challenges of appraising multi-family properties.  However, these will be of little benefit if this appraiser were to take on an assignment such as the appraisal of a neighborhood shopping center.  This knowledge and experience has not rendered this multi-family appraiser competent to appraise a house prior to taking the assignment, which is what USPAP requires.

An extension of the knowledge and experience qualifications is the last component of competency, which requires the appraiser to be familiar with laws and regulations that apply to the appraiser, the assignment, and/or both.  Therefore, it includes the knowledge of and adherence to USPAP.  This component of competency may be the most difficult to understand, thus to implement.

Consider the appraiser commissioned to appraise a single-family residence located along a road the state’s DOT wants to expand (and which it will accomplish by involving federal funding).  As part of this expansion, the state wants to take five feet (5′) from the front of the site.  Since this site is 100′ wide, and 125 feet deep, the state therefore wants to take 500 square feet from this 12,500 square foot site, rendering it a 12,000 site, a four percent (4%) decrease.  What are some of the laws and regulations of which the appraiser must be aware?  What are some of the appraisal issues of which the appraiser must be aware?  Consider the following:

• Will the 500 square feet be taken under state eminent domain regulations or federal eminent domain regulations? Why?
• How, if at all, will the taking of the 500 square feet affect the improvements to the site, other than the dwelling unit? Why?
• How, if at all, will the taking of the 500 square feet affect the dwelling unit(s)? Why?
• How, if at all, will the taking of the 500 square feet affect the overall property? Why?
• Will the taking of the 500 square feet bring about any special benefits to the property? How? Why?
• How, if at all, will the taking of the 500 square feet affect the highest and best use of the property as if vacant? Why?
• How, if at all, will the taking of the 500 square feet affect the highest and best use of the site as improved? Why?
• Will the taking of the 500 square feet bring about any changes to zoning/setbacks that would limit any future development of the site (say after a tornado destroyed the house)?
• Will the appraiser be conducting the appraisal under the regulations of the Yellow Book, USPAP, or those of some other federal and or state agency? How would that affect the appraisal process?  Why?
• To which definition of market value will the appraiser form a value opinion? Why?
• In an eminent domain appraisal, what do “before” and “after” mean?
• Is this assignment one of the appraisal of the entire property, merely the vacant land, merely the improvements, or some combination of these? Why?
• Is a residential appraiser qualified to render such a value opinion, or is this a job for a general-certified appraiser? Why?
• Which appraisal reporting form, if any form at all, would the appraiser use to communicate the results of his/her appraisal to the client? Why?

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Even though the appraisal assignment involves a single-family residence, this assignment involves far more than the appraisal of a single-family residence.  Indeed, these questions illustrate that

“…[c]ompetency may apply to factors such as, but not limited to, an appraiser’s familiarity with a specific type of property or asset, a market, a geographic area, an intended use, specific laws and regulations, or an analytical method.  If such a factor is necessary for an appraiser to develop credible assignment results, the appraiser is responsible for having the competency to address that factor…” (ibid., lines 309 to 313 – emphases added).

A criticism of USPAP is that it does not define competent, thus it also does not define incompetent.  However, Standard ONE, an extension of the COMPETENCY RULE, makes it clear that, to develop a real property appraisal, an appraiser must be able to

“…identify the problem to be solved, determine the scope of work necessary to solve the problem, and correctly complete the research and analyses necessary to produce a credible appraisal…[and then the appraiser must]…be aware of, understand, and correctly employ those recognized methods and techniques that are necessary to produce a credible appraisal”… (ibid., lines 421 to 431).

Thus, the implication from Standard ONE is the competent appraiser knows how to carry out, and then carries out, all of the above.  On the other hand, the incompetent appraiser does not know how to carry them out, thus does not, or chooses not to do so.  This lack of knowledge & experience, or this choice, renders the appraiser incompetent.  Therefore, the appraisal itself will suffer from lack of credibility.  Finally, this lack of knowledge & experience implies the appraiser will report the results of the appraisal in a misleading manner.

Consider the ETHICS RULE and the myriad choices the appraiser makes as part of developing a value opinion, and then reporting it.  The Comment to the ETHICS RULE makes it clear “…[t]his [ETHICS] Rule specifies the personal obligations and responsibilities of the individual appraiser…” (ibid., lines 182, 183 – capitalization in original).  Given these personal obligations, as well as the COMPETENCY RULE’s requirement the appraiser be aware of (i.e., understand and follow) the laws and regulations governing him/her, then failure to be competent is a choice the appraiser makes literally on an assignment-by-assignment basis.  When an appraiser chooses such a step, it is a violation of the ETHICS Rule, since violation of ethics is a conscious, informed choice the appraiser freely makes.

When it comes to choices, many appraisers choose to mislead, even though that is not their intent.  There are three components to misleading (even though neither USPAP nor Fannie Mae defines to mislead).  These are:

• An appraiser misleads the client/intended user (CIU) when the appraiser leads the CIU to a conclusion(s) the facts and market-evidence do not support;
• An appraiser misleads the CIU when the appraiser fails to lead the CIU to a conclusion(s) the facts and market-evidence do indeed support;
• An appraiser misleads the CIU when, despite the facts and the market-evidence, the appraiser fails to lead the CIU anywhere.

So, how do competency and a misleading appraisal report connect?  Look back at that part of the COMPETENCY Rule that teaches that the appraiser must be able to recognize and then comply with the laws and regulations that apply to the appraiser or to the assignment. Given how an appraiser can mislead (above), if the appraiser has not led the CIU anywhere, then the appraiser has mislead the CIU.  The competent appraiser has the professional chops to identify the problem to be solved, the knowledge and experience to complete the assignment competently, and then the ability to recognize and then comply with the laws and regulations that apply to the appraiser or the assignment.  Lack of any one of these skills renders the appraiser incompetent to complete an appraisal assignment credibly.

The reasoning and support behind this conclusion come from SR2-3, USPAP’s certification standard.  That Standards Rule makes it clear the appraiser’s “…analyses, opinions, and conclusions were developed, and this report has been prepared, in conformity with [USPAP]” (ibid, lines 749, 750).  To illustrate, assume the appraiser made a size adjustment based first on his/her “…judgment and experience…”, rather than first on market-evidence and -data. Since, in this case, there are no facts or evidence to support this adjustment, the appraiser has violated SR1-3, specifically the Comment to it, by “…making an unsupported assumption or premise about market area trends…” (ibid., lines 513, 514).

Without market support for this adjustment, the appraiser has not developed his/her analyses, opinions, and conclusions in conformity with USPAP, a violation of the COMPETENCY Rule, thus Standard ONE.  Without market support for this adjustment, the appraiser has communicated assignment results that s/he knew (or should have known) were misleading, a violation of the ETHICS Rule, as well as Standard TWO.

This essay shows the competent appraiser knows what to do in any appraisal situation, and then does it in a timely manner.  Further, the competent appraiser, thru his/her logic and reasoning, leads the CIU to a conclusion(s) the facts and the evidence support. Finally, the competent appraiser knows and understands that merely going thru the motions of an appraisal does not develop a credible appraisal, nor does reporting it in a non-misleading manner.  Rather, competency requires the appraiser to know how and why s/he developed the assignment results in the way s/he did.  Competency requires the appraiser to understand the development protocols of that appraisal so deeply and completely that s/he can report/explain it to the CIU in a clear, concise, and non-misleading manner.

Therefore, the COMPETENCY Rule encourages appraisers to be competent as they carry out their commissions, as well as to explain to them how to be competent, and why these are important.  Competency means knowing what to do in any appraisal situation.  It means knowing how to carry out whatever is necessary to form a credible value opinion and then to communicate the results of the appraisal clearly and in a manner not misleading. Finally, in communicating the results of the appraisal, the appraiser must also clearly explain why s/he took the steps s/he did to solve the CIU’s appraisal problem.

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About the Author
Timothy C. Andersen, MAI, MSc, CDEI, MNAA and J. Nathan Pippin, MNAA are the authors of this article, thus responsible for the entirety of it. They are grateful to Diana T. Jacob for editorial suggestions and general support. Any opinions this essay expresses, and any errors in it, are entirely those of the authors. © Timothy C. Andersen, 2018. All Rights Reserved)

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