We’ve seen the standard which requires an appraiser to use ‘correct’ methods (whatever those may be). And which also requires the appraiser to use ‘sufficient’ care (whatever that is). All part of the legacy USPAP Uniform Standards of Professional Appraisal Practice. Be correct and be careful!
Editor’s Note: This is Standards, part 3.15 of George Dell’s series on How Do I Move to EBV? Links to the earlier posts are here.
When these become embedded in the administrative law of the several states, an appraiser’s performance and ethics may then be measured by these precise judgments: 1) be correct, 2) be careful, and 3) be “credible”! Best of all, according to USPAP Standard 1-1, these can be used by users of appraisal services “as a checklist.”
A problem. How do you “checklist” measure correctness, carefulness, and credibleness?
Correctness in appraisal research and analysis is measured by its believability. “Correct” is defined as “free from error.” This requires a reviewer/checker to know the actual correct way to compare against.
Carefulness is measured by good thought and attention, or avoiding danger or mishap. I am not sure how to measure goodness in thought, attentiveness, or safety. Each reviewer/checker no doubt will have different standards to do this measurement. (For a future Analogue Blog.)
Credibility is defined (in USPAP) as “worthy of belief.” Believability is accomplished through convincing arguments. The measure is then “worthiness” — the quality of being “good enough” to believe.
Can we then say that current prevailing practices focus on worthy-of-belief execution by the appraiser? The analysis is rated by worthiness – judged by its believability, not its usefulness or reliability.
Is it worth a look at what clients and the public trust actually need in valuation service(s)?
- Lenders want to know the risk of loss of collateral.
- Investors want to know the risk of failure to gain a return on investment.
- Equity enforcers want to know the risk of unfairness in litigation or property taxation.
So how can these needs for risk knowledge be met?
Simple. Reliability and risk measurement.
The focus of any new regulations and standards for valuation must be on reliability. Reliability is the obverse of risk. Coins have two sides: the reverse (tails), and the obverse (the head of the coin). Our reliability measure must look at the outcome of heads – the probability of success. In this sense, the measure of risk is the same as the measure of reliability.
We need measures of reliability of valuations – whether performed by appraisers, inspectors, AVMs, hybrids, evaluations, or “appraisal waivers.”
We need new regulations, new standards, and new principles to provide users and the public trust with results that actually serve these real needs.
We need recognition of the fallacy of a point value: a subjective personal opinion by a “licensed” appraiser, evaluator, or black-box secret AVM output.
It’s no more difficult to score or estimate the reliability (or uncertainty) of a work than it is to magically settle on an exact, single number opinion. Even a subjective estimate is better than none at all!
With Evidence Based Valuation (EBV©) methods, we develop the means to provide a reliability/risk measure.
September 27, 2023 @ 6:07 am
The timing of this post is uncanny George. Its 4am local pacific time and I am beginning to stir from my slumber. I am rolling over the past several weeks of my interactions within my profession. I have been struggling with remarks I have made openly and questioning whether I may have been out of place. My open remarks were simply to acknowledge that I personally had questioned some appraisal processes and that in my area, those processes were often unable to help make sense of many markets.
As I tossed and turned this morning, I took a quick peak at what notifications had arrived overnight. There it was, your post, I checked to see if it was a re-hash as some social media posts do that, but this one had today’s date. I would have normally set down the phone and read messages after at least one more attempt to get some desperately needed sleep, but I know your posts are usually succinct. This one was, but the fist line struck me, “use correct methods”.
I follow many social media appraiser groups and recently I came across a post on the subject of “How do you derive adjustments for living area”. That is always a “hot” topic. In one particular thread I came across a posted reply by an established member of my association. The post replied to was describing what I would refer to as the Ratterman method and the reply to that was that they were adjusting “incorrectly” and then went on to describe the “correct method” which I would refer to as the Moye method.
Up until just recently I had been taught the “correct” Moye method and never even heard the word Ratterman mentioned in any of our materials nor any method that resembled that. My take is that the Moye method is rigid, you must always adjust by the GLA $/sqft at its fully extracted rate. The Ratterman method is far less rigid, but it is in the materials for the largest appraisal institute. From what I can deduce many, many followers of the Ratterman method have overlooked or forgotten what the Ratterman method prescribes, and they simply take the easiest part of it. The Moye method is far easier to measure and check for accuracy or error. The Ratterman method offers no such consistency as I read it, but it is a much larger volume of text on that subject.
I had been researching this subject over the past couple of years and purchased both Residential Property Appraisal and Valuation by Comparison which is a more condensed version of the former both by Mark R. Ratterman. If you only read the latter, which many appraisers refer to when citing the “sources” for their methods, I can see how the nuances of the full Ratterman method could be overlooked.
Prior to the appraisal group exchange, I had already been questioning my own assumptions. When I noticed appraisers making adjustments that did not follow the strict Moye method, I had assumed they were wrong or in error automatically just because the “Math” was not correct. When I saw one of my peers admonish a member of another association for being wrong, I realized maybe my mentors were not just teaching the basics, it appeared they were also stuck to them.
Overall, I was beginning to conclude that nobody was right, and nobody was specifically wrong. Both of these methods could benefit from a more Evidence Based scientific approach to Value EBV as you have described it. Clearly, there is a lack of continuity between appraisers’ opinions on how adjustments should be calculated because they cannot produce a correct single point value.
The term scientific would lead one to believe that any approach that uses science surely must mean they are looking for an exact scientific conclusion. Therefore, it could not possibly be suitable for analyzing how humans decide to buy and sell their personal possessions (a piece of real estate is not a personal property) so maybe that is a part of the equation. The point is, as you have stated, the goal of the “correct” methods is to find a specific answer to hold accountability but then the “rules” rely on personal appraiser opinion which allows for interpretation leading to less certain reliability.
Maybe what is needed is a more scientific approach that exposes the range of probabilities providing more credible support for conclusions or opinions that fall within that range.