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What does “Misleading” Mean?
By Tim Andersen, MAI
What does “misleading” mean when it comes to an appraisal? Let’s try to answer this most important question.
USPAP’s SR1-1 makes it clear that to develop “…a real property appraisal, an appraiser must…be aware of, understand, and correctly employ those recognized methods and techniques that are necessary to produce a credible appraisal…not commit a substantial error of omission or commission that significantly affects an appraisal…and…not render appraisal services in a careless or negligent manner, such as by making a series of errors that, although individually might not significantly affect the results of an appraisal, in the aggregate affects the credibility of those results” (ibid).
SR2-1 teaches “…each written or oral appraisal report must…clearly and accurately set forth the appraisal in a manner that will not be misleading” (ibid – emphasis added).
Misleading is not a USPAP-specific term. In other words, USPAP does not define misleading, since the common business definition suffices. One definition of misleading is “giving the wrong idea or impression”. This is not sufficiently specific, however, to communicate what USPAP means by misleading. Therefore, consider this definition specifically in a USPAP context:
An appraiser misleads a client/intended user when s/he leads that client/intended user to a conclusion the facts, reason, logic, evidence, and/or analyses do not support; when s/he fails to lead the client/intended user to a conclusion the facts, reason, logic, evidence, and/or analyses indeed support; and/or by failing to support the facts, reason, logic, evidence, and/or analyses in the report, fails to lead the client/intended user anywhere.
Real estate appraisals deal in facts, reason, logic, evidence, and analyses. So, the appraiser engages in critical thinking to complete an appraisal assignment credibly. Therefore, the appraiser’s opinions, statements of facts within the appraisal report, the highest and best use conclusion and so forth must have their bases in facts, reason, logic, evidence, and analyses. SR1-4 makes it clear the appraiser must “…collect, verify, and analyze all information necessary for credible assignment results” (ibid – emphasis added).
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To mislead, in a USPAP context, involves an omission or commission (or both) of something in the above definitions which gives the wrong idea or impression about how the appraiser developed and/or reported the assignment’s conclusion(s).
In USPAP’s Certification (SR2-3) the appraiser certifies, “…my analyses, opinions, and conclusions were developed, and this report has been prepared, in conformity with [USPAP]”. It is this specific oath in USPAP that introduces the concept of misleading, as well as starts to explain it as USPAP contemplates it.
In SR1-1, USPAP makes clear the appraiser must “…be aware of, understand, and correctly employ those recognized methods and techniques that are necessary to produce a credible appraisal” (ibid – emphasis added). In light of this, consider the concept of highest and best use as a component of the appraisal process.
Highest and Best Use Analysis is one of two major-components of the fourth step in the appraisal process. It comes after the appraiser has identified the (appraisal) problem, determined a scope of work to result in credible analyses, collected the property data & described the subject property. It is part of the data analysis step in the appraisal process. In it the appraiser determines (a) the highest and best use of the site as if vacant, (b) the highest and best use of the site as improved, and (c) the site’s ideal improvement(s) (assuming the site were vacant).
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This order notwithstanding, the appraiser shows his/her conclusion of the improved property’s highest and best use, on the (vacant) site section of the form. Thus, highest and best use appears to be a function of zoning (a legal use). In reality, it is a function of its (a) legal permissibility, (b) physical possibilities, and (c) the financial feasibility of any improvements, either proposed or existing, as of the effective date of the appraisal.
To comply with the Certification in USPAP, the appraiser must use market data, evidence, reason, analyses, and logic to determine the site’s highest and best use as vacant, its highest and best use as improved, and what its ideal improvements would be were the site vacant.
Since the 1004 form does not have the space to develop highest and best use as if vacant, highest and best use as improved, and the ideal improvements as if the site were vacant, many appraisers simply conclude such analyses & reporting are not necessary. This simply is not true because the appraisal process, which USPAP enshrines as Standard One, calls for the three separate analyses as part of that process (supra). When an appraiser omits one of these, yet certifies that s/he complied with USPAP in forming the value opinion, that oath is misleading.
This monograph, in presenting a USPAP-specific definition of misleading, helps the appraiser understand what USPAP means by “…the appraiser must clearly and accurately set for the appraiser in a manner that will not be misleading…” (ibid).
In sum, the appraiser misleads the client/intended user that s/he followed USPAP in developing/reporting the appraisal, yet that statement is not true.
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About the Author
Timothy C. Andersen, MAI is a commercial real estate appraiser, AQB-certified USPAP instructor, USPAP consultant, and the instructor for a new online course, How to Raise Appraisal Quality and Minimize Risk (7 Hours CE), designed to help appraisers stay out of trouble with their state boards and avoid lawsuits. Visit OREPEducation.org to enroll today!
Send your story submission/idea to the Editor: isaac@orep.org
by Nita Maney
It’s essential that appraisers adhere strictly to facts, reason, logic, evidence, and analysis to provide credible results. Misleading clients or failing to support conclusions with solid evidence not only undermines the credibility of the appraisal but also can have significant consequences for all parties involved.
-by John Pratt
I agree with part of Mr Andersons definition of “Misleading” however “failing to lead”, “fail to lead” or “fails to support” is NOT misleading. If the appraiser arrives at the correct solution and has not lead or supported that conclusion in the report it is not necessarly “misleading”. How can it be misleading is you have not lead the client. I agree that the appraiser may have not supported his approach or procedures however that is not misleading. Common sense tells me that if you have not lead someone down the road that you can not be misleading them. Tim, you may be much smarter than I but who gave you the authority to define the word “misleading” when used in the context of an appraisal.
-by Michael Ford, AGA, SCGREA, GAA, RAA, Realtor®
I always enjoy Mr. Andersen’s informative articles. This is no exception.
I have to wonder though. Are we over thinking and complicating a fundamental definition and as a result ascribing a more egregious error to common unintentional mistakes? Look up the word online:
“mis·lead, /misˈlēd/Submit, verb
cause (someone) to have a wrong idea or impression of someone or something.
“the government misled the public about the road’s environmental impact”
synonyms: deceive, delude, take in, lie to, fool, hoodwink, throw off the scent, pull the wool over someone’s eyes, misguide, misinform, give wrong information to; informal lead up the garden path, take for a ride, give someone a bum steer “Caroline deliberately misled her”
Each definition is clearly one of an INTENTIONAL act rather than an unintentional act or honest error.
THAT is a problem. Increasingly, State Regulators use a ‘throw in the kitchen sink too approach’ in determining whether violations of USPAP have taken place worthy of fines or punitive actions. The more violations; the higher the fines. Figuring roughly $500 per item or “violation” as a start. At best calling an error ‘misleading’ in addition to the actual section of USPAP that is at issue results in an unfair pile on of charges and fines.
More often, it creates an air of suspect integrity. There is not an appraiser alive that does not know if they are misleading someone. It is a deliberate or overt act of commission or omission. It is not, and should not be a non-substantive mistake. It is USPAP itself that says the measure of compliance is what one’s peers would do; and that all USPAP reviews must be performed from the perspective of the intended use by the client in mind.
Increasingly, I see USPAP being interpreted in a vacuum. Investigators are taught that they themselves do not have to follow USPAP if they call their appraisal reviews “investigations” despite many states specific language to the contrary. Those who teach this are ‘misleading.’
TAF and even ASC have offered opinions that investigations of ‘fact’ are not really appraisal review. Again, that is misleading if one reads USPAP to see what specifically an appraisal review is or is not.
It can be argued that the stated goal of The Appraisal Foundation to preserve and protect the public interest is also misleading since that is not what has been achieved.
-by Arty
The zoning section of Page 1 of the 1004 (legally permissible) and the questions that follow handles 25% of the H & B analysis. In addition, compliance with zoning covertly handles the “physically possible” mandate. And pure “old fashion common sense” says that you need a large enough lot (parking) for 90% of commercial or industrial operations. Let’s not reinvent the wheel!
-by Michael S. Elliott, SRA, AI-RRS
While I agree that more HBU analysis is required on the 1004 form than the provided “checkbox”, Mr. Andersen makes a bold statement that would render every single URAR appraisal I have ever seen in a 20 year career non-compliant: “Since the 1004 form does not have the space to develop highest and best use as if vacant, highest and best use as improved, and the ideal improvements as if the site were vacant, many appraisers simply conclude such analyses & reporting are not necessary. This simply is not true because the appraisal process, which USPAP enshrines as Standard One, calls for the three separate analyses as part of that process (supra). ”
Where exactly in USPAP is the claim made? I can only speculate that Mr. Andersen is of the opinion that because Standard 2 requires summarization of the analysis and to “contain sufficient information to enable the intended users of the appraisal to understand the report properly” (SR 2-1) that somehow this is necessary? Perhaps taking a step back and realize USPAP also indicates the content of an appraisal report should be consistent with its intended use. Does the intended user of an existing single-family home in an existing, developed subdivision for lending purposes need to know the highest and best use “as vacant” or the ideal improvements? No, of course not, which is why NO RESIDENTIAL APPRAISER includes those on a URAR report. There is no Advisory Opinion or FAQ on this subject from TAF in either, thus clearly TAF does not see this is a significant issue. If Mr. Andersen thinks he has knowledge or an argument that thousands of residential appraisers (including SRAs) are all “doing it wrong” for decades he’ll have to provide a more specific example or rationale than a vague “reading into” the intent of Standard Rule 1.
-by Michael Ford, AGA, SCGREA, GAA, RAA, Realtor®
There are many subdivisions with sfr’s on lots within them that are not purely residentially zoned sites. It’s more common in larger, older urban areas. Of course, H&BU remains applicable. Admittedly 90% to 95% may not have a viable alternative use other than sfr, but it is the 5% to 10% which do, that our clients are concerned with.
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