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Is USPAP biased?  (Appraisal Foundation, Uniform Standards of Professional Appraisal Practice)

Is this possible?  It can’t be!

This part 8 of a multipart look at issues in valuation standards.

Editor’s Note: This is Standards, part 3.8 of George Dell’s series on How Do I Move to EBV? Links to the earlier posts are here.

Let’s look at the relevant USPAP sections in the order they appear.

Per USPAP definitions, an appraisal is “an opinion of value.”  And bias “precludes an appraiser’s impartiality, independence, or objectivity.”  And every appraisal must be credible “worthy of belief.”

Our goal here is to see how USPAP rules may discourage, allow, or even encourage bias.

The Ethics Rule, Conduct section, states that bias is not allowed!

The Scope of Work Rule states that credibility is measured in the context of the client’s intended use.

It additionally says that the client communicates most of the information necessary.  Although the appraiser is responsible for identification of subject characteristics.  The Acceptability section states clearly that scope of work should meet the “expectations of parties [clients] who are regularly intended users for similar assignments.”

We should expect that clients will regularly desire an appraiser to meet their expectations, biased or not.  (Or should we expect that users will not have any bias toward their $ goal?)

Standards Rule 1-3(v), requires analysis of “market area trends.”  Unfortunately, “market area” is not defined.  Market area trend is not relevant!  (An area, or neighborhood will contain a wide variety of property types sizes, ages, and locations, with varying price trends!  What matters is the trend of competitive property sales.  Wrong data in, produces biased results out.

Legacy appraisal methods prescribe that an appraiser is to select some “comparable sale data.”  Unfortunately, what is a “comp” is not described nor defined in USPAP.  (The Appraisal of Real Estate defines a comp is “similar, competitive, and “able to be compared.”)  In turn, these terse terms also are not defined.

“Picking comps”  is a doubly-biased enterprise.  The selection is not random, not complete, nor defined by the market itself.  Any selection which does not include the complete competitive market segment (CMS)© is statistically biased.  It does not analyze the market.  It analyzes the hand-picked sales data.

The bias is analytic in nature (as taught in statistics classes).  AND, it is biased by the mind-set of the appraiser at that moment.  Note:  the mind-set might be convenience, client expectations, unconscious desire to keep a client (and future fees) happy.  Bias:  analytic and personal.  Darn.

USPAP does take the first step toward unbiased data selection.  It suggests the use of all comparable sales data as are available and as are necessary.  (Not as picked.)

USPAP is founded on believability, not reliability.  Unfortunately, subjective “reviewer” believability becomes a USPAP “violation.”  .

Such costs are not imposed on competing valuation enterprises.  In fact, the history of regulation and quasi-governmental mega lenders has been to chip away at appraiser USPAP principles using  exceptions, exclusions, hybrids, automateds, bifurcateds, “price opinions,” “evaluations”, “wavers”, and “acceptances.”

USPAP does not explicitly promote bias.  Unfortunately, it enables and obscures analytic bias as well as personal intentional or unconscious bias under the cover of the goal of subjective believability-credibility rather than measurable reliability.