RAC WHITE PAPER PART I
In response to the deteriorating real estate market, employers began giving relocation appraisers “special” instructions aimed at controlling the results of the appraisals. Among them are some that are unethical or illegal for the appraiser to comply with. Some present potential tax and legal problems for the client as well.
In response, Relocation Appraisers and Consultants (RAC) appointed a “White Paper” committee and charged it with the task of sorting out which instructions can, or cannot, be complied with and why.
The committee’s work was extensive and lasted from May through November of 2008. The resulting White Paper has been published on RAC’S web site (www.RAC.net). It identifies which client practices are illegal or unethical for the appraiser to comply with as well as identifying practices that may cause the IRS to disqualify the transfer from its tax-protected status.
The paper is lengthy and lays out, in detail, an analysis of the issues surrounding each of these special instructions. The purpose of this article is to provide a brief summary of the findings. The entire paper should be read to thoroughly understand the issues, conclusions and recommendations.
The two primary types of problems identified were  instructions that were illegal or unethical for the appraiser to comply with; and instructions that resulted in “employee enrichment”.
The latter refers to instructions that will produce an estimate of value that exceeds what the home can realistically be expected to sell-for under current market conditions. The practical result is a “bonus” for the transferee in that they receive more for the home than it is worth and, because the transaction is tax-protected, it would be a tax-protected bonus.
This is a problem for the employer because it may result in the loss of the tax protected status of the relocations done under these instructions. It is a potential problem for the appraiser because the IRS may conclude that the appraiser participated in this effort of tax evasion.
Appraisers are bound by USPAP (the Uniform Standards of Professional Appraisal Practice) which are the basis for all state license laws. Because USPAP is complicated, it is difficult to immediately identify what is, or is not, allowed by USPAP. Compounding this is the fact that USPAP was revised annually (now bi-annually) which means what may have been legal last year may not be legal this year.
To sort through this, RAC appointed five of the leading relocation appraisers in the country, including Jeff Barta SCRP; Brad Charnas SCRP, SRA, GMS; Jay Delich SCRP, SRA, IFA; Jim Gargano CRP, IFAS; and Bob Headrick SCRP, SRA, IFA; to the committee and they, in turn, consulted with Arnold Schwartz, SCRP, SRA. and numerous USPAP instructors and authorities. The findings of the White Paper represent their unanimous conclusions. So, what are they?
Instruction #1: Do Not Make Market-Change Adjustments.
Appraisers are required to adjust for the differences between the comparable sale and the Subject property and one of these differences is the date of sale. If a home sold when market prices were generally higher or lower than they are now, and adjustment is required. This is not specific to relocation appraisals. We know of no circumstance under which appraisers can legally comply with this instruction. In a declining market, complying with this instruction would result in an inflated appraisal (employee enrichment).
Instruction #2: Do Not Make Forecasting Adjustments.
The White Paper concluded that appraisers cannot unconditionally accept this instruction.
The most that appraisers can do is develop Anticipated Sales Price (applying forecasting, which is a necessary element of Anticipated Sales Price valuations) and then produce a second value in the narrative section of the report stating what the value would be without forecasting and defining that value as something other than Anticipated Sales Price.
The appraiser would need to state the type of value it is (IE, Market Value) and provide a definition for that type of value, and the source of the definition.
Instruction#3: Base the appraisal on something other than a 120-day value.
Although the Worldwide ERC Guidelines require that the Anticipated Sales Price be based on a 120-day market exposure period, clients may ask for the appraisal to be based on a different exposure period assumption and the appraiser is free to do so as long as proper disclosure is made that the appraisal deviates from Worldwide ERC Guidelines. The White Paper also recommended (but did not require) that the appraiser provide a separate indication of what the value would have been based on the standard 120-day exposure period.
Instruction#4: Do Not Use REO/Foreclosure Properties as Comparables.
The White Paper concluded that the appraiser cannot unconditionally accept this instruction without taking additional steps. It recommends that the employer or their representatives not make such a request or, if they do, to put it in terms of a suggested guideline rather than a requirement of the assignment.
Making it a guideline leaves the decision as to whether to follow the guideline or to not follow it up to the appraiser thus leaving the appraiser responsible for explaining why the guideline could not be complied with.
If the client refuses to give the appraiser the latitude to make this decision, an additional option would be for the client to follow a two-step process.
The first step would be a consultation assignment where the appraiser is asked to research the subject neighborhood and market-area and then determine whether a credible appraisal could be completed without the use of foreclosure properties as comparables.
This would be a fee-based assignment which would stand on its own and would require a careful definition of the scope of work for the assignment.
The client would then be free to determine whether they want to order an appraisal or not but, if they do, it would be without the instruction to not use REO/Foreclosure properties as comparables.
Instruction#5: Appraise the Property “As If Vacant”.
The White Paper concludes that the appraiser can comply with these instructions without violating Worldwide ERC Guidelines, USPAP, or state license law.
Issue #6: Valuation Appeals and Report Updates.
It is not uncommon for employees to formally appeal the contents of the appraisal for a variety of reasons. As well, there are instances where an appraiser is asked to update their value estimate from an earlier appraisal.
The White Paper examines these issues with guidance for how-to-comply, but one specific instruction that cannot be complied with is the instruction to not reduce the value estimate as a result of replying to the appeal or completing the update. It is not unusual for the client to say that the appraiser is not free to lower the value but, if the appraiser is asked to review their earlier value, they cannot accept the instruction to not lower their value.
Instruction#7: Appraiser Must Make A “Market Prep” Adjustment.
The “Market Prep” adjustment is a specific adjustment intended to adjust for the fact that homes almost always need repairs and improvements once vacated and this adjustment was intended to cover the cost of those repairs.
The White Paper concluded that appraisers cannot comply with the instructions to make a separate Market Prep adjustment without violating USPAP and state license law as any need for improvements or repairs should already be accounted for in the condition and/or appeal/décor adjustments.