STANDARD 1.

In developing a real property appraisal, an appraiser must be aware of, understand, and correctly employ those recognized methods and techniques that are necessary to produce a credible appraisal.

Comment: Standard 1 is directed toward the substantive aspects of developing a competent appraisal. The requirements set forth in Standards Rule 1-1, the appraisal guidelines set forth in Standard Rules 1-2, 1-3, 1-4, and the requirements set forth in Standards Rule 1-5 mirror the appraisal process in the order of topics addressed and can be used by appraisers and the users of appraisal services as a convenient checklist.

Standards Rule 1-1.

In developing a real property appraisal, an appraiser must:

1. (a) be aware of, understand, and correctly employ those recognized methods and techniques that are necessary to produce a credible appraisal;

   Comment: Departure from this binding requirement is not permitted. This rule recognizes that the principle of change continues to affect the manner in which appraisers perform appraisal services. Changes and developments in the real estate field have a substantial impact on the appraisal profession. Important changes in the cost and manner of constructing and marketing commercial, industrial, and residential real estate and changes in the legal framework in which real property rights and interests are created, conveyed, and mortgaged have resulted in corresponding changes in appraisal theory and practice. Social change has also had an effect on appraisal theory and practice. To keep abreast of these changes and developments, the appraisal profession is constantly reviewing and revising appraisal methods and techniques and devising new methods and techniques to meet new circumstances. For this reason it is not sufficient for appraisers to simply maintain the skills and the knowledge they possess when they become appraisers. Each appraiser must continuously improve his or her skills to remain proficient in real property appraisal.

2. (b) not commit a substantial error of omission or commission that significantly affects an appraisal;

   Comment: Departure from this binding requirement is not permitted. In performing appraisal services an appraiser must be certain that the gathering of factual information is conducted in a manner that is sufficiently diligent to ensure that the data that would have a material or significant effect on the resulting opinions or conclusions are considered. Further, an appraiser must use sufficient care in analyzing such data to avoid errors that would significantly affect his or her opinions and conclusions.

3. (c) not render appraisal services in a careless or negligent manner, such as a series of errors that, considered individually, may not significantly affect the results of an appraisal, but which, when considered in the aggregate, would be misleading.

   Comment: Departure from this binding requirement is not permitted. Perfection is impossible to attain and competence does not require perfection. However, an appraiser must not render appraisal services in a careless or negligent manner. This rule requires an appraiser to use due diligence and due care. The fact that the carelessness or negligence of an appraiser has not caused an error that significantly affects his or her opinions or conclusions and thereby seriously harms a client or a third party does not excuse such carelessness or negligence.

   Standards Rule 1-2.

   In developing a real property appraisal, an appraiser must observe the following specific appraisal guidelines:

4. (a) adequately identify the real estate, identify the real property interest, consider the purpose and intended use of the appraisal, consider the extent of the data collection process, identify any special limiting conditions, and identify the effective date of the appraisal;

5. (b) define the value being considered; if the value to be estimated is market value, the appraiser must clearly indicate whether the estimate is the most probable price:

   1. (i) in terms of cash; or
   2. (ii) in terms of financial arrangements equivalent to cash; or

   3. (iii) in such other terms as may be precisely defined; if an estimate of value is based on submarket financing or financing with unusual conditions or incentives, the terms of such financing must be clearly set forth, their contributions to or negative influence on value must be described and estimated, and the market data supporting the valuation estimate must be described and explained;

      Comment: For certain types of appraisal assignments in which a legal definition of market value has been established and takes precedence, the Jurisdictional Exception may apply to this guideline. If the concept of reasonable exposure in the open market is involved, the appraiser should be specific as to the estimate of marketing time linked to the value estimate.

6. (c) consider easements, restrictions, encumbrances, leases, reservations, covenants, contracts, declarations, special assessments, ordinances, or other items of a similar nature;

7. (d) consider whether an appraisal fractional interest, physical segment, or partial holding contributes pro rata to the value of the whole;

   Comment: This guideline does not require an appraiser to value the whole when the subject of the appraisal is a fractional interest, a physical segment, or a partial holding. However, if the value of the whole is not considered, the appraisal must clearly reflect that the value of the property being appraised cannot be used to estimate the value of the whole by mathematical extension.

8. (e) identify and consider the effect on value of any personal property, trade fixtures or intangible items that are not real property but are included in the appraisal.

   Comment: This guideline requires the appraiser to recognize the inclusion of items that are not real property in an overall value estimate. Additional expertise in personal property (See Standard 7) or business (See Standard 9) appraisal may be required to allocate the overall value to its various components. Separate valuation of such items is required when they are significant to the overall value.

   Standards Rule 1-3.

   In developing a real property appraisal, an appraiser must observe the following specific appraisal guidelines:

9. (a) consider the effect on use and value of the following factors: existing land use regulations, reasonably probable modifications of such land use regulations, economic demand, the physical adaptability of the real estate, neighborhood trends, and the highest and best use of the real estate;

   Comment: This guideline sets forth a list of factors that affect use and value. In considering neighborhood trends, an appraiser must avoid stereotyped or biased assumptions relating to race, age, color, religion, gender, or national origin or an assumption that racial, ethnic, or religious homogeneity is necessary to maximize value in a neighborhood. Further, an appraiser must avoid making an unsupported assumption or premise about neighborhood decline, effective age, and remaining life. In considering highest and best use, an appraiser should develop the concept to the extent that is required or a proper solution of the appraisal problem being considered.

10. (b) recognize that land is appraised though vacant and available for development to its highest and best use and that the appraisal of improvements is based on their actual contribution to the site.

    Comment: This guideline may be modified to reflect the fact that, in various legal and practical situations, a site may have a contributory value that differs from the value as if vacant.

    Standards Rule 1-4.

    In developing a real property appraisal, an appraiser must observe the following specific appraisal guidelines, when applicable:

11. (a) value the site by an appropriate appraisal method or technique;

12. (b) collect, verify, analyze and reconcile:

    1. (i) such comparable cost data as are available to estimate the cost new of the improvements (if any);
    2. (ii) such comparable data as are available to estimate the difference between cost new and the present worth of the improvements (accrued depreciation);
    3. (iii) such comparable sales data, adequately identified and described, as are available to indicate a value conclusions;
    4. (iv) such comparable rental data as are available to estimate the market rental of the property being appraised;
    5. (v) such comparable operating expense data as are available to estimate the operating expenses of the property being appraised;

    6. (vi) such comparable data as are available to estimate rates of capitalization and/or rates of discount.

       Comment: This rule covers the three approaches to value. See Standards Rule 2-2(j) for corresponding reporting requirements.

13. (c) base projections of future rent and expenses on reasonably clear and appropriate evidence;

    Comment: This guideline requires an appraiser, in developing income and expense statements and cash flow projections, to weigh historical information and trends, current market factors affecting such trends, and anticipated events such as competition from developments under construction.

14. (d) when estimating the value of a leased fee estate or a leasehold estate, consider and analyze the effect on value, if any, of the terms and conditions of the lease(s);

15. (e) consider and analyze the effect on value, if any, of the assemblage of the various estates or component parts of a property and refrain from estimating the value of the whole solely by adding together the individual values of the various estates or component parts;

    Comment: Although the value of the whole may be equal to the sum of the separate estates or parts, it also may be greater than or less than the sum of such estates or parts. Therefore, the value of the whole must be tested by reference to appropriate market data and supported by an appropriate analysis of such data.

    A similar procedure must be followed when the value of the whole has been established and the appraiser seeks to estimate the value of a part. The value of any such part must be tested by reference to appropriate market data and supported by an appropriate analysis of such data.

16. (f) consider and analyze the effect on value, if any, of anticipated public or private improvements, located on or off the site, to the extent that market actions reflect such anticipated improvements as of the effective appraisal date;

    Comment: In condemnation valuation assignments in certain jurisdictions, the Jurisdictional Exception may apply to this guideline.

17. (g) identify and consider the appropriate procedures and market information required to perform the appraisal, including all physical functions, and external market factors as they may affect the appraisal;

    Comment: The appraisal may require a complete market analysis (See Standards Rule 4-4).

18. (h) appraise proposed improvements only after examining and having available for future examination:

    1. (i) plans, specifications, or other documentation sufficient to identify the scope and character of the proposed improvements;
    2. (ii) evidence indicating the probable time of completion of the proposed improvements; and

    3. (iii) reasonably clear and appropriate evidence supporting development costs, anticipated earnings, occupancy projections, and the anticipated competition at the time of completion.

       Comment: The evidence required to be examined and maintained under this guideline may include such items as contractor's estimates relating to cost and the time required to complete construction, market, and feasibility studies; operating cost data; and the history of recently completed similar developments. The appraisal may require a complete feasibility analysis (See Standards Rule 4-6).

19. (i) All pertinent information in items (a) through (h) above shall be used in the development of an appraisal.

    Comment: See Standards Rule 2-2(k) for corresponding reporting requirements.

    Standards Rule 1-5.

    In developing a real property appraisal, an appraiser must:

20. (a) consider and analyze any current Agreement of Sale, option, or listing of the property being appraised, if such information is available to the appraiser in the normal course of business;

21. (b) consider and analyze any prior sales of the property being appraised that occurred within the following time periods:

    1. (i) one year for one-to-four family residential property; and

    2. (ii) three years for all other property types;

       Comment: The intent of this requirement is to encourage the research and analysis of prior sales of the subject; the time frames cited as minimums.

22. (c) consider and reconcile the quality and quantity of data available and analyzed within the approaches used and the applicability or suitability of the approaches used.

    Comment: Departure from this binding requirement is permitted. See Standards Rule 2-2(k) Comment for corresponding reporting requirements.