An Introduction to Appraisers
An appraiser is a professionally trained individual who possesses knowledge and expertise required to estimate or determine the value of an asset in question. In the housing industry for instance, the appraiser reports to the lender the price at which property is likely to retail in a competitive market (Canonne and Macdonald, 2003). There are varieties of factors that determine property valuation. The nature and location of the property are some of these factors. Since property cannot change its location, upgrades or improvement to the house are implemented with a view to improve its value.
The Housing Market Crash
In the USA, the housing market crash occurred due to a rapid rise and decline in the cost of land and property. The rapid rise in prices is caused by an increase in speculative demand for houses. Similarly, unnecessary exaggeration of prices of property by appraisers could have caused the housing bubble. In August 1985, the term scope of appraisal appeared in literature published by the former American Institute of Real Estate Appraisers (AIREA) (Anglyn et al, 1992). Later, it was included as a code of ethics and incorporated into the text of AIREA’s Standards of Profession Practice course in March 1986. According to AIREA the scope of the appraisal refers to the extent of collecting, confirming, and reporting data. The standard imposes responsibilities upon the appraiser with regard to the accuracy and validity of information conveyed through appraisal reports (Anglyn et al, 1992).
Pressure on Appraisers
Eaton in his investigation regarding the appraisal bubble explains that there may have been instances whereby lenders pressured appraisers to inflate property values in their favor (2009). Using the case of DHI Mortgage, he explains that at the time, the company had requested an appraisal for a property pending its sale. Paperwork given to eAppraiseIT included suggested estimates of property pending the assignment. However, upon determination, Tipton, the employee of eAppraiseIT, valued the property at $237,000, a value lower than the estimated $245,000 suggested by the client DHI Mortgage. Later, Tipton explains that he was asked to revalue the property to reflect prevailing market rates (Eaton, 2009). The above case highlights the plight of many appraisers at the time, most of whom felt pressured to inflate property values, a case that contributed to the housing market crash.
Protecting the Reputation of Appraisers
In the wake of the above accusations, there’s a need to emphasize the importance of protecting the reputation of appraisers from any unsubstantiated claims. Appraisers have a role to protect the professional reputation of others in the same field. It is unethical for an appraiser to damage the reputation of any appraiser by making false statements or creating illusions regarding the professional reputation of their fellow appraiser. Similarly, appraisers have a mandate to society to rally for disciplinary action in cases whereby fellow appraisers have acted or defied established ethical codes of conduct. In such instances, investigations are performed and guilty members and clients are charged. Possible crimes include transgression, indiscipline, or suspension of members. Through it all, the affected appraiser is expected to cooperate with the officers involved (Wendt, 1956).
Obligations of Appraisers
However, in case of prolonged public disputes, affected parties are expected to present unbiased data, information, or any analysis regardless of its effect on the respective case. In the event that an appraiser is given the work of another, he has the liberty to reject it. Such an appraiser could cite honesty or objectivity as part of the reasons. However, they are not allowed to comment about the work product or give a view on the same matter. Appraisers have an obligation to exhibit high degrees of credibility and accuracy in matters concerning their assignments. In the case of the housing bubble and consequent crash, such actions would have acted to mitigate any unprecedented rise in property costs. In the appraisal field, competence and ethical practice are essential. By pursuing further education, attending conferences, research, and training, appraisers can ensure competence. Professional competence enables appraisers to execute their assignments without the possibility of follow-ups.
The Evolution of Appraisal Practice
According to Boykin and Ring (1993), the Modern Era of Appraisal Practice, the development appraisal of real estate practice occurred in three eras. The first era occurred roughly from 1906 to the 1940s. Pioneering work in the industry occurred during this period. During the second era, refined valuation procedures were established. From the 1960s, the present and third era began. This period requires accuracy and disclosure in transferring processes as well as recording of sale prices. This new era helped to establish accuracy in the appraisal market. The use of computers to perform numerical, statistical analysis accuracy in sales transactions is an example of such a procedure. Adaptive estimation procedures such as the Multiple Regression Analysis (MRA) and (EPR) were used during the period (Boykin and Ring, 1993). Further, the market comparable sales approach was used to represent analytical extensions methods. In this approach, features and descriptions of previous sales of properties are known. Consequently, it is possible to determine the value of a subject property in a similar market era.
The Value Theory in Appraisal
The Value Theory is an appraiser theory developed in the 1930s with a view to improving valuation procedures (Bonbright, 1937). Bonbright determined that the first most important problem in any appraisal was to secure a value acceptance definition for the purpose of the investigation. In his view, there were two basic concepts of value: value of the owner and market value. He embraced value to the owner as the most universal and central concept. Property value refers to the mean value that a specific individual or group of individuals who have ownership interest attach to the property. Since objects of wealth may be capable of conferring different advantages on owners, one cannot speak of the value of property in general but one must speak about its value to some specific person or group.
Market value, on the other hand, refers to the price that a piece of property would retail, in a competitive market setup. In a competitive market, all parties are assumed to be well informed of all the factors prevailing in the market. The use of market value has been used as a basis for settling all varieties of legal disputes within the property market. According to Wendt, the Value theory is inadequate as an appraisal theory because it concentrates on the process of establishing property values rather than the appraisal process itself (1956).
The Need for Independence in Property Valuation
At the moment, the housing market is relatively stable. Intervention mechanisms implemented by the FBI alongside other government agencies have helped to stabilize as well as prosecute any violations of ethical practices by appraisal firms such as eAppraiseIT (Eaton, 2009). The need for independence in property valuation activities is essential in ensuring that the housing market crash of 2006 to 2012 does not repeat itself.
References
Anglyn, William Teddy; Robinson, John A. The Appraisal Journal; Chicago vol 60, Iss. 1. (Jan 1992): 74.
American Inst. of Real Estate Appraisers, S.R. 2-2(f), standards of professional practice and conduct (Chicago: American Inst. of Real Estate Appraisers,1987), 12.
Bonbright, J.C. (1937). The valuation of property: A treatise on the appraisal of property for different legal purposes. New York: McGraw-Hill.
Boykin, J.H., and A.A. Ring. (1993). The valuation of real estate, 4th ed. Englewood Cliffs, NJ: Regents/Prentice-Hall.
Canonne, J., and R.J. Macdonald. (2003). Valuation without value theory: A North American ‘‘appraisal.’’ Journal of Real Estate Practice and Education 6 (1): 113–162.
Eaton, J. (2009, April 14). The Appraisal Bubble. Retrieved from https://www.publicintegrity.org/2009/04/14/2895/appraisal-bubble
Wendt, P.F. (1956). Real estate appraisal: A critical analysis of theory and practice. New York: Holt
