Refresher of Terminology Changes
Tuesday, January 25, 2022 in Education
This is a reminder of the terminology changes made in 2020 and 2021 that affect your appraisal reports. Knowing how busy we all are, I am sure that many of you read the ISA Education newsletter posts regarding these changes in terminology to align with USPAP terms and definitions and then put them aside. Now that the New Year has arrived, you are updating your appraisal report templates and looking for this information. I thought it pragmatic to re-address the most recent changes made for your benefit. See below the listing of changes that are now in effect -
Replacement Value: is the amount it would cost to replace an item with one similar and like quality purchased in the most appropriate marketplace within a reasonable amount of time. Replacement value includes not only the costs of acquiring or replicating the property but also all the relevant costs associated with replacement. These costs may include framing, crating, and transportation. As appraisers who follow USPAP, we determine value and therefore we determine the Replacement Value of an item(s). Reminder: if taxes, shipping, etc. are not going to be included in the value conclusion, include a statement in your appraisal report stating this information. See ISA Checklist #33.
Replacement Cost: an insurance term meaning the cost to replace an item with another having similar qualities within a reasonable amount of time in the relevant marketplace. This is done through production, reproduction or purchase - Replacement Cost may be considered when determining the Replacement Value.
Replacement Cost Comparable: the cost necessary to replace an item of personal property with an equivalent item having similar appearance, quality, condition, age, authorship, and utility within a reasonable amount of time in the relevant marketplace. This is generally used with antiques or items where age or provenance is a significant value characteristic. Replacement Cost Comparable may be considered when determining the Replacement Value.
Replacement Cost New: the cost necessary to replace an item of personal property with a new item of like kind, utility and having similar qualities within a reasonable amount of time in the relevant marketplace. This considers that the items may be upgraded to the latest model or style, in the primary (first offered) marketplace. Replacement Cost New may be considered when determining the Replacement Value.
Cost Approach: Analyzes comparable cost data as are available to replace the property being appraised with a suitable substitute.
Income Approach: Analyzes comparable data as are available and/or applies to present value formula to calculate the present worth of income anticipated to be generated in the future through sale of lease.
Sales Comparison Approach: Analyzes comparable sales data as are available to indicate a value conclusion within the market considered most common for the property.
Reminder: include a statement of the valuation approach used and a definition of that approach with a citation. Do not forget to explain the unused approaches and specifically state why each was not used as well. See ISA Checklist #15
Hypothetical Appraisal: This term is deleted. An appraisal can be based on a hypothetical condition(s); however, it is not a “hypothetical” appraisal. It is a very real appraisal made under very specific conditions.
Assignment Conditions: assumptions, extraordinary assumptions, hypothetical conditions, laws and regulations, jurisdictional exceptions, and other conditions that affect the scope of work. This definition now comes directly from USPAP. ISA Checklist #31 has been updated accordingly: Statement of assignment conditions encountered and extraordinary assumptions and/or limiting conditions made, if any;…)
Assignment Conditions are those that occur during the development of an appraisal.
Possible assignment conditions that occur during the inspection, which could change the value determination should the appraiser not have been able to inspect the property completely, include: the appraiser could not remove the painting from the frame; the object was located on an upper ledge of the household and could not be inspected thoroughly; the diamond could not be removed from the setting; the car battery was dead and mileage could not be confirmed; no electricity available to test the electrical items for working condition; due to the amount of identical widgets the appraiser needed to do a sampling of the property; or the appraiser had a very narrow window of time for a thorough inspection of all the property.
Assignment Conditions can also include Extraordinary Assumptions such as the appraiser assuming there are no signatures, inscriptions, labels, or condition issues in the unseen areas of an item when the item could not be taken out of its frame or removed from a high shelf. But remember that an Extraordinary Assumption can be used ONLY if the appraiser has a reasonable basis for the Extraordinary Assumption. (Standard Rule 1-2(f)(ii) – FAQ #244, 2020-2021 USPAP Edition, page 291)
Limiting Conditions: limit the appraiser’s liability and limit the scope of the appraiser’s responsibilities in an appraisal assignment.
Limiting Conditions are those that occur during the reporting of an appraisal.
Possible limiting conditions could include: the appraiser relied upon documented sales data and believes them to be true and correct, but the appraiser does not assume responsibility for the accuracy of such information; the appraiser is not an authenticator, thus the appraisal report must not be considered a certificate of authenticity; the appraiser relied upon a third party authentication report or quality certification such as a GIA report, but the appraiser does not assume responsibility for the accuracy of such information; or the appraiser is not a professional conservator, thus the appraisal report must not be considered a formal condition or conservation report.
These updated definitions and changes are discussed in greater depth during the ISA Requalification Course which is given regularly throughout the year. You do not need to wait until your five-year mark to attend a requalification course to update your appraisal definitions and appraisal reports. If you would like to get a head start on the process, please visit ISA-Appraisers.org/courses for a listing of the upcoming Requalification Courses scheduled. USPAP Courses are also listed. The 7hr USPAP Update Course is new for 2022, so sign up today to keep your compliance up to date.
My many thanks to Meredith Meuwly, ISA CAPP; Kirsten Smolensky, JD, ISA CAPP; Diane Marvin, ISA CAPP; and Tim Luke, ISA AM for their stellar work last year in updating the ISA definitions. The current ISA Appraisal Report Checklist is dated August 2021 and can be accessed here. If you would like a copy of the updated August 2021 edition of the Core Course in Appraisal Studies manual, please visit ISA-Appraisers.org to order a hard copy of the manual or an electronic PDF that can be instantly downloaded on your office computer.
Here is hoping that your appraisal business is off to a smashing start in 2022 and that you all stay safe and healthy.
Judith Martin, ISA CAPP
ISA Director of Education