One of the questions I get asked frequently is a rather simple one: how many comparables are required in doing a USPAP compliant appraisal? The answer is short and sweet. USPAP does not say.
In fact, USPAP is rather mull on the subject, which leaves one to wonder if they are required at all. Many appraisers assume or have been taught that listing comparable sales is only a requirement for certain IRS appraisals, like a charitable contribution. Other intended uses like insurance coverage are unnecessary since the insurance carrier does not care. This may be a generalization that does not hold water. Let me explain.
Using Comparables
The use of comparables is part of the approaches to value we utilize in our methodology, particularly in the sales comparison approach. (Some organizations used to call this the market data approach; a term not used in USPAP.) The thrust of this method is to gather and analyze actual sales of similar properties, as of a specific effective date, that one can reasonably associate with the subject property. Characteristics of each are objectively reviewed to contextualize the sameness or difference in the results. By gathering a sufficient number of transactions, we begin to see a correlation or pattern. Those results form a matrix or arrangement which can be the basis for a value conclusion. (Often this is a statistical concept known as the mode.) Adjustments are made based on physical traits, conditions and time of sales, economic conditions, and other value variations. The appraiser has a conclusion based on a logical process.
This reasoning is also done in one of the other approaches to value known as the cost approach. The cost approach gathers data based on the cost to replicate (production or reproduction) or to buy another replacement. Often one must seek numerous sources to come to a judgement. These can be quotes, listings, offers, price schedules, and even manufacturer’s suggested prices, depending on the market the client has available and uses. The gathering process may be as simple as a single entry or complicated by various sources and disparate results.
Both approaches to value are part of the appraisal reasoning process: the development of an appraisal (“doing it”). For personal property, including jewelry, the “doing an appraisal” is covered in USPAP Standard 7. The preface to the standard says that “an appraiser must identify the problem to be solved, determine the scope of work necessary to solve the problem, and correctly complete research and analysis necessary to produce a credible appraisal.”
This is further clarified in Standard 7-4 which states that an appraiser must collect, verify, and analyze all information necessary for credible assignment results. Their key words are ALL and CREDIBLE. Gathering data must be a complete endeavor. It is not finding one piece of supportive data, or even numerous pieces of data, but “all” that is necessary to support a credible (believable) conclusion. Sometimes, that may require a single piece of evidence, but often it requires many pieces, since many pieces indicate a pattern or frequent occurrence. The appraiser must decide on the preponderance of data: is it supportive or just suggestive?
USPAP uses the following words and phrases to describe sufficiency:
In a sales comparison approach, the data must indicate a value conclusion.
In a cost approach, the data must be able to competently estimate the replacement cost.
These are not mere suggestions, but professional opinions of value. They are based on logic, reasoning, and substance.
Reconciliation
A key and final part of doing the appraisal is reconciling the quality and quantity of data available (the comps). Another word, not used by USPAP, is justification. It means to prove what is declared. Has the appraiser proven the value conclusion? Appraising is not a magical “Kreskin” type of mental gymnastic that amazes by pulling numbers out of the air, nor is it a proclamation based on the importance of the appraiser (it is because I said so). In truth, the conclusion is only as solid as the foundation which supports it, no matter who says it.
Transmitting the Report
Once the appraisal has been done, (a number has been reached), the appraiser must now communicate it to the client. This can be done through a written report or verbal communication. USPAP warns that the opinions must not be rendered in a careless manner (Standard 8). It must contain sufficient information for the intended user to understand it. That does not mean just the value conclusion, but the process that led to that conclusion.
This includes summarizing the scope of work necessary in the assignment, including the research and analysis required to reach the conclusion. It may also mean an explanation of what was not required. It explains how the appraiser “did the appraisal.” It shows there was a method-that the number was not “pulled out of the air.”
Standard 8-2-(x)-5 states the appraiser must provide sufficient information to show they complied with USPAP Standard 7 (doing the appraisal), including summarizing the information analyzed and the reasoning that supports the final conclusion. Again, key words are SUFFICIENT and SUMMARIZE. Sufficient information could be only a few citations, or it could be hundreds. What was sufficient in doing the appraisal should be sufficient in transmitting the appraisal.
To what degree must we explain our comps? Summarization. That means succinct and precise, “covering the main points briefly.” The choice of presentation is left up to us: narrative, chart, spreadsheet, footnote, endnotes, etc. The number is left to us as well: one, ten, a hundred. Have we provided enough? Can the user understand what we did, how we did it, and the data that supported it?
Obviously, some common sense is in order. An item valued at a much higher amount may need the inclusion of more comps than one at a much lower amount. The intended use of litigation may require a thorough disclosure of all the evidence (comps) rather than the function of family distribution-which may require few. Some users may have specific requirements (IRS) and others none. In addition, a USPAP Restricted Appraisal is less stringent about including the comparable research data which is why they suggest a restriction that limits the use of the report to the client and a named intended user.
So, the answer is rather simple. USPAP does not require a specific number of comparables. It does not even state comparables must be included. However, our appraisal reports must communicate our results in a manner that is not misleading. The story should be told so that the user understands what we did and how we did it. Do not shorten the story!
Leon Castner, ISA CAPP, ASB Certified USPAP Instructor
Note: The next 2024 7 HR USPAP class will be held November 11 via Zoom. The next 15 HR USPAP will be held December 3 & 4 (12-7PM). Call Leon at 910.232.3950 to save your space and register. Leon is an AQB Certified USPAP instructor.