There is no defined “MAI Appraisal”. Some think of it as an appraisal report of a certain format. Others might say it is a valuation carried out adhering to particular standards. Finally, some think it refers to a valuation and report completed by an appraiser with the MAI designation. Of the three, the third comes the closest to being accurate.
The MAI designation was established almost 100 years ago by the American Institute of Real Estate Appraisers (precursor to the modern-day Appraisal Institute). The Institute and the designation were a response to the impacts of the Great Depression and the emerging recognized need for objective and professional assistance in evaluating real estate. The early leaders of the Institute looked to the Royal Institution of Chartered Surveyors in Great Britain as a model for a professional appraisal organization. The Institute refined professional standards for appraisal practice, developed a Code of Ethics, and established requirements for professional membership. The MAI designation originally identified a person as being a “Member of the Appraisal Institute”. From the beginning earning the designation required a combination of education, experience, and peer review. It quickly became seen in the legal, financial, governmental, and accounting communities as the “gold standard” in professional valuation and appraisal.
With the passage of time, a certain style of reporting emerged among MAI appraisers. It was narrative in format and divided into sections that included the premises of the appraisal, a description of the property, and a discussion of the valuation. While it was never defined in any formal way as an MAI Appraisal, it was often identified as such by users of appraisal services. The basic underlying outline of the report is seen in narrative reports to this day.
Today, appraisers in the United States are governed by the Uniform Standards of Professional Appraisal Practice (USPAP), a document published by the Appraisal Foundation and recognized by the Appraisal Subcommittee of the United States Congress. All state licensing agencies (e.g., Bureau of Real Estate Appraisers in California) are required to adopt USPAP as the applicable standards for professional appraisal.
The first standard of USPAP is focused on developing an opinion of value. The second standard is concerned with reporting the results of the valuation undertaking. While, in practice, an appraiser may be working on the report as the valuation progresses, the valuation and report are recognized as separate.
Standard 2 of USPAP is subtitled, “Real Property Appraisal, Reporting”. There is no required format for an Appraisal Report. However, Standard 2-1 does include General Reporting Requirements. There are only three;
Each written or oral real property appraisal must:
a) clearly and accurately set forth the appraisal in a manner that will not be misleading;
b) contain sufficient information to enable the intended user(s) of the appraisal to understand the report properly; and
c) clearly and accurately disclose all assumptions, extraordinary assumptions, hypothetical conditions and limiting conditions used in the assignment.
The rest of Standard 2 addresses, in some detail, what information must be included in an Appraisal Report. This includes identifying the client and any intended users, identifying the subject property, identifying the intended use, the interest valued, and the type and definition of value. It includes stating the date of value and the scope of work undertaken. The Appraisal Report must include sufficient information to indicate that the appraiser complied with the valuation standards included in Standard 1 of USPAP. Finally, the report must contain a value conclusion and a signed Certification.
Generally, an appraisal report format falls into one of four categories. These are; the oral report, the form report, the letter report, and a narrative report. Each report format has its place, but they are not automatically interchangeable. Often, it is the intended use of the appraisal that determines which format is most appropriate.
An oral report can seem illusive. In its purest form, there is no tangible evidence of a report. However, per USPAP, the same standards apply to an oral report as to any written report. That certainly includes the above cited general requirements along with the other items required in all Appraisal Reports. Perhaps the most common form of oral report is expert testimony in a deposition, hearing, or trial. Even when a formal written report is not required, many appraisers feel a letter or memo report format (Restricted Appraisal Report) is good to have as an adjunct to the oral testimony.
While there are various iterations, a form report generally refers to a report designed for use by lenders in considering residential value in mortgage underwriting situations. It is this report that the typical consumer is most likely to have encountered. However, the reports are designed for and by lenders (Fannie Mae and Freddie Mac). They are standardized and uniform so that reviewers, underwriters, and loan committees can readily find information that is needed for consideration of real estate as security for a mortgage. Much of the report consists of boxes to be checked and blanks to fill in. The language in the report is often cryptic and not readily understandable to the casual reader. Many professional appraisers feel that these reports are inappropriate for any use other than for a lender. They risk being in violation Standard Rule 2-1b. When the user is anyone other than a lender, the reports likely do not “contain sufficient information to enable the intended user(s) of the appraisal to understand the report properly”.
A letter report is probably the least common of the reporting options. It is often used in situations where the intended user is knowledgeable about the property and the valuation
process. The letter report is succinct and includes the basics with little that is superfluous to the value of the property. An offshoot of the letter report is the memo report which is really only a variation in style. The letter report is frequently labelled a Restricted Appraisal Report which puts the reader on notice that it may not be readily understandable to anyone other than
the intended user.
Finally, there is the narrative report. As indicated above, this report is the direct descendant of the earlier discussed “MAI Appraisal”. It can vary in length and detail, but it is the most inclusive of the reporting options. Generally, the report format leads the reader from laying out the underlying premises of the valuation, a description of the property with photos, a consideration of highest and best use, and the valuation section that can include two or three of the “approaches” to value. Ideally it is a stand-alone document that can be read and understood by typical consumers. With modern technology, narrative reports are not much more difficult to produce than the form or letter options.
In making the distinction between the valuation and the report, it is important to point out that the scope of work for the valuation may be exactly the same regardless of the reporting option. All reports should include a Scope of Work. The Scope of Work is included to inform the reader as to what was, and what was not, done in the valuation. A shortened reporting format does not mean the valuation was limited in any way. And, a limited scope valuation can be reported in a lengthy narrative document. As stated above, the intended use of the appraisal is often the determining factor in deciding which reporting format is appropriate.
Mr. Arnold is a principal at Hammock, Arnold, Smith & Company. They are a general practice appraisal firm providing valuation and evaluation services to a variety of clients including corporations, government agencies, the legal and accounting communities, financial institutions, private individuals, and others.
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