STANDARD 4.

In performing real estate or real property consulting services, an appraiser must be aware of, understand, and correctly employ those recognized methods and techniques that are necessary to produce a credible result.

Comment: Standard 4 is directed toward the same substantive aspects of professional practice set forth in Standard 1, but addresses the performance of consulting services by an appraiser. Consulting is a broad term that is applied to studies of real estate other than estimating value. Land utilization studies; highest and best use analyses; marketability, feasibility, or investment studies; and other research-related studies are examples of consulting assignments. An appraiser must have the ability to develop an analysis/research program that is responsive to the client's objective; to perform primary research; to gather and present secondary and tertiary data; and to prepare a documented written report.

Standard 4 addresses the concept of identifying the client's objective. There is an important difference between performing an impartial consulting service as a disinterested third party that responds to the client's stated objective and performing a consulting service that is intended to facilitate the achievement of the client's objective. While both are legitimate business activities within the realm of professional appraisal practice, the appraiser must recognize the distinction and the consequent obligations.

An appraiser retained to act as a disinterested third party (or reasonably perceived by the public as acting as a disinterested third party) in performing an unbiased consulting service cannot be compensated in a manner that is contingent on the results. However, an appraiser retained to perform a legitimate service such as brokerage, mortgage banking, tax counseling, or zoning advice may be compensated by a fee contingent on the results achieved, but only when a proper disclosure of the role being performed by the appraiser is made.

Standards Rule 4-1.

In performing real estate or real property consulting services, an appraiser must:

1. (a) be aware of, understand, and correctly employ those recognized consulting methods and techniques that are necessary to produce credible results;
2. (b) not commit a substantial error of omission or commission that significantly affects the results of a consulting service;

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

   Comment: Standards Rule 4-1 is identical in scope and purpose to Standards Rule 1-1. Departure from binding requirements (a), (b), and (c) is not permitted.

   Standards Rule 4-2.

   In performing real estate or real property consulting services, an appraiser must observe the following specific guidelines:

4. (a) clearly identify the client's objective;
5. (b) define the problem to be considered, define the purpose and intended use of the consulting service, consider the extent of the data collection process, adequately identify the real estate and/or property under consideration (if any), describe any special limiting conditions, and identify the effective date of the consulting service;
6. (c) collect, verify, and reconcile such data as may be required to complete the consulting service;

7. (i) if the market value of a specific property is pertinent to the consulting assignment, an appraisal in conformance with Standard 1 must be included in the data collection;

   all pertinent information shall be included;

   Comment: If an appraisal is pertinent, the appraiser performing the consulting service should carefully review the ETHICS PROVISION and the explanatory comment at the beginning of STANDARD 4 to ensure that any personal interests of the appraiser or contingent compensation for the consulting service do not conflict with the independence required of the appraisal function. The appraiser performing the consulting service may find it necessary to retain (or suggest that the client retain) another appraiser to perform the appraisal.

8. (d) apply the appropriate consulting tools and techniques to the data collected;

9. (e) base all projections on reasonably clear and appropriate evidence.

   Comment: A consulting service must begin with a clear identification of the client's objective, which may not be explicit in the client's statement of the assignment. The appraiser should precisely define the nature of the problem the client faces and the purpose of the consulting service. If the consulting services involves specific real estate or property, the appraiser must obtain a legal description, street address or other means of specifically and adequately identifying the real estate or property.

   The appraiser must assess the overall range of work for solving the problem, the methodologies to be used, and the specific research data directly relevant to the consulting service.

   Standards Rule 4-3.

   In performing real estate or real property consulting services, an appraiser must observe the following specific guidelines when a conclusion or recommendation is required by the nature of the assignment:

10. (a) identify alternative courses of action to achieve the client's objectives and analyze their implications;
11. (b) identify both known and anticipated constraints to each alternative and measure their probable impact;
12. (c) identify the resources actually or expected to be available to each alternative and measure their probable impact;

13. (d) identify the optimum course of action to achieve the client's objective.

    Comment: After proper consideration of all alternative courses of action, the appraiser should identify the optimum course of action in terms of the client's objective and forecast the likelihood it can be achieved. All conclusions must be logically related to the resources available and the constraints that may limit any of the alternatives.

    Standards Rule 4-4.

    In performing a market analysis, an appraiser must observe the following specific guidelines when applicable:

14. (a) define and delineate the market area;
15. (b) identify and analyze the current supply and demand conditions that make up the specific real estate market;
16. (c) identify, measure, and forecast the effect of anticipated development or other changes and future supply;

17. (d) identify, measure, and forecast the effect of anticipated economic or other changes and future demand.

    Comment: The appraiser should carefully define and delineate the pertinent market area for the analysis. Supportive reasoning for the selection of the boundaries must be stated. The appraiser should identify the specific class(es) of real estate under consideration and analyze the forces that are likely to affect supply/demand relationships.

    The appraiser is expected to provide a comprehensive and economic description of the existing supply of space for the specific use within the defined market area, an explanation of the competitive position of the subject, and a forecast of how anticipated changes in future supply (additions to or deletions from the inventory) may affect the subject property.

    The appraiser is expected to project the quantity and price or rent level of space that will be demanded within the particular submarket. The capture or penetration rates of competitive projects should be examined in sufficient detail to lead to a reasoned conclusion as to the forecasted price or rent levels at which the market is likely to accept the subject space and the estimated absorption or rent-up time period.

    The analysis of economic changes in the market in which the property is located may include the following determinants of demand: population, employment, and income characteristics; interest rates; zoning and other regulations; rents and/or sales; new construction planned or underway; vacant sites as potential competition to the subject; transportation; taxes; and the cost and adequacy of sewer, water, power, and other utilities. Forecasting techniques should be relevant, reasonable, practical, and supportable. Regardless of the forecasting models employed,  the appraiser is expected to provide a clear and concise explanation and description of the models and methodologies.

    Standards Rule 4-5.

    In developing a cash flow and/or investment analysis, an appraiser must observe the following specific guidelines when applicable:

18. (a) consider and analyze the quantity and quality of the income stream;
19. (b) consider and analyze the history of expenses and reserves;
20. (c) consider and analyze financing availability and terms;
21. (d) select and support the appropriate method of processing the income stream;

22. (e) consider and analyze the cash flow return(s) and reversion(s) to the specified investment position over a projected time period(s).

    1. (a) prepare a complete market analysis;
    2. (b) apply the results of the market analysis to alternative courses of action to achieve the client's objective;
    3. (i) consider and analyze the probable costs of each alternative;
    4. (ii) consider and analyze the probability of altering any constraints to each alternative;

    5. (iii) consider and analyze the probable outcome of each alternative.

       Comment: An important step in feasibility analysis is to complete a market analysis.

       The appraiser should compare the following criteria from the client's project to the results of the market analysis: the project budget (all construction costs, fees, carrying costs, and ongoing property operating expenses); the time sequence of activities (planning, construction and marketing); the type and cost of financing obtainable; cash flow forecasts over the development and/or holding period; and yield expectations. The appraiser should have enough data to estimate whether the project will develop according to the expectations of the client and is economically feasible in accordance with the client's explicitly defined financial objectives.

    Comment: Since real estate investment decisions are predicted on financial implications, the consulting service should define the client's investment criteria, consider major variables in the real estate and financial markets, and forecast the anticipated results. Definitions of the financial indices used (such as internal rate of return) and explanations of the financial analysis techniques and computer programs employed should be included. The ETHICS PROVISION and COMPETENCY PROVISION are especially important to Standards Rule 4-5 with regard to hypothetical conditions and technical proficiency.

    Standards Rule 4-6.

    In developing a feasibility analysis, an appraiser must observe the following specific guidelines when applicable: